Contraction in July Factory Output: IIP

• 12 Sep 2020

Why in News

Recently, the National Statistical Office (NSO) has released data, highlighting the decline in the factory output (also called Industrial Production) for the fifth consecutive month, with July 2020 posting a contraction of 10.4% compared to July 2019.

• The data, however, recorded a sequential improvement from 15.8% contraction seen in June, reflecting some resumption in industrial activity with the lifting of lockdown restrictions.

Key Points

• Cumulatively, the Index of Industrial Production (IIP) contracted by 29.2% for April-July against a growth of 3.5% in the same period last year.
  
  • The IIP had grown by 4.9% in July 2019.
• Reason: The decline is mainly due to degrowth in manufacturing, mining, capital goods, and consumer durables output.
• Contraction Data: Barring consumer non-durables, all other sectors including manufacturing, mining, primary goods, capital goods contracted in July.
  
  • Consumer Non-durables: A proxy for the Fast Moving Consumer Goods (FMCG), it posted a positive growth of 6.7%.
  • Manufacturing Sector: Weight of 77.6% in IIP, contracted by 11.1% in July from a contraction of 16.0% in June.
  • Electricity Output: It contracted by 2.5% as against a double-digit contraction of 10.0% in June.
    
    • It recorded the best sequential improvement and may turn out to be the first sector, apart from consumer non-durables, to find its way in positive territory going ahead.
• Similar Trends: The decline in industrial growth mirrors the trend in other high-frequency indicators for July.
  
  • India’s Manufacturing Purchasing Managers’ Index (PMI) had stood at 46 in July compared with 47.2 in June. A print below 50 signifies a contraction.
• Impact: The negative IIP for July, which is the first month of the second quarter, will reflect in the expected contraction in the Gross Domestic Product (GDP) growth numbers for the July-September quarter.
  
  • India’s GDP growth contracted by 23.9% in the April-June quarter, the worst among G20 countries.

Index of Industrial Production

• It is an indicator that measures the changes in the volume of production of industrial products during a given period.
• It is compiled and published monthly by the National Statistical Office (NSO), Ministry of Statistics and Programme Implementation.
  
  • NSO is the central statistical agency of the government, set up by an Act of the Parliament, Statistical Services Act (Chapter 386) 1980.
• IIP is a composite indicator that measures the growth rate of industry groups classified under:
  
  • Broad sectors, namely, Mining, Manufacturing, and Electricity.
  • Use-based sectors, namely Basic Goods, Capital Goods, and Intermediate Goods.
• Core Sector Industries comprise 40.27% of the weight of items included in IIP.
  
  • The eight core Industries in decreasing order of their weightage: Refinery Products> Electricity> Steel> Coal> Crude Oil> Natural Gas> Cement> Fertilisers.
• Base Year for IIP is 2011-2012.
• Significance of IIP:
  
  • It is used by government agencies including the Ministry of Finance, the Reserve Bank of India, etc. for policy-making purposes.
  • IIP remains extremely relevant for the calculation of the quarterly and advance GDP estimates.

Source: IE