Industrial production growth slips to 3.1% in September

Industrial production, also referred to as the factory output, gauged by the Index of Industrial Production (IIP), slipped to a seven-month low of 3.1% in September 2021, compared to 12% in August 2021.

The 3.1% growth in industrial production in Sep’21 can be attributed to a low base effect as the y-o-y comparison is with Sep'20 where the overall industrial output shrank considerably due to Covid-induced measures. In comparison to Sep'19 (a Covid-neutral month), overall industrial production in Sep’21 registered an annualized growth of only 2%.

In the half-year period between Apr-Sep’21, industrial production grew by 23.5%, compared to a de-growth of 20.8% in the year-ago period.

Economists foresee the revival of industrial output to be a challenge in the near-short term, especially given the supply-side issues affecting most sectors. As the low base effect wears off, the growth rate may come under even greater pressure.

Sectoral Production

The IIP is the weighted average of 3 indexes - manufacturing, mining, and electricity. The relative weight of these in the Index is manufacturing (77.6%), mining (14.4%), and electricity (8%). The sector composition is one of the ways to classify the products in IIP, under which a basket of products is grouped under manufacturing, mining, and electricity.

The manufacturing sector, which comprises 77.6% of the index of industrial production, grew 2.7% in September in comparison to 9.9% in August. The mining output increased by 8.6% in comparison to 23.6% in August while Electricity grew by 0.9% compared to 16% in August.

Use-Based Production

The IIP also constitutes 6 use-based weighted-average indexes. The relative weight of these in the overall IIP are - Primary Goods (34%), Capital Goods (8.2%), Intermediate Goods (17.2%), Infrastructure/Construction Goods (12.3%), Consumer Durables (12.8%), and Consumer Non-Durables (15.3%). This is another way to classify the products in IIP under which products are grouped by the use to which they are put to.

The output of capital goods - a significant barometer of investment, grew 1.3% in September. Consumer durables output declined by 2% while consumer non-durables output declined by 0.5%.

The factory output of the eight core sectors (Coal, Crude Oil, Natural Gas, Refinery Products, Fertilizers, Steel, Cement, and Electricity), also known as the infrastructure output, grew 4.4% in September 2021 compared to 11.5% in August 2021. The eight core industries consist of 40.27% of the weight of items that are included in the Index of Industrial Output (IIP). The growth in the factory output of the 8 core sectors was led mainly by the coal, natural gas, and cement sectors.

Reference Reading

What is the Index of Industrial Production (IIP)?

The Index of Industrial Production (IIP) reflects the growth of core industrial sectors in an economy. The IIP is a composite indicator that measures the short-term changes in the volume of production of a basket of industrial products during a given period. It essentially takes a basket of industrial products and creates an index by assigning different weights to different products. Growth in industrial production is determined by comparing the monthly values of this index with the index value in the same month last year. This rate of growth (positive or negative) in IIP signals India’s industrial health or the lack of it.

The IIP is the weighted average of 3 indexes - Mining (14.4%), Manufacturing (77.6%), and Electricity (8%). In addition, the IIP also constitutes 6 use-based weighted-average indexes - Primary Goods (34%), Capital Goods (8.2%), Intermediate Goods (17.2%), Infrastructure/Construction Goods (12.3%), Consumer Durables (12.8%), Consumer Non-Durables (15.3%). Eight core Industries (Coal, Crude Oil, Natural Gas, Refinery Products, Fertilizers, Steel, Cement and Electricity) comprise 40.27% of the weight of the items included in IIP which is tracked through the Index of Infrastructure Output. Some sectors may outperform others due to a variety of reasons, such as growth prospects, position in the business cycle, government policy, international factors, etc.

IIP is a short-term measure of industrial growth till the outcomes from the Annual Survey of Industries (ASI) and National Accounts Statistics such as GDP are available. It is compiled and published monthly by the National Statistical Office, MoSPI six weeks after the reference month ends.

The Base Year for the IIP is 2011-12 with a value of 100. So, if the index for mining in Mar'20 is say 132.7, it implies that compared to the 2011-12 index value of 100, mining has performed at a growth rate of 32.7% in 8 years.