Economic Overhaul: India's Industrial Production Index Set for Major Makeover! Find Out What It Means for Investors!

The Ministry of Statistics and Programme Implementation (MoSPI) has released a discussion paper proposing a new methodology for the Index of Industrial Production (IIP) to enhance its accuracy and relevance. This includes a plan to substitute factories that have permanently closed or changed their production lines, addressing a long-standing issue where defunct factory data could skew the index.

The new series, slated for release on May 28 next year, will adopt 2022-23 as its base year, moving from the current 2011-12 base year. The proposed substitution process will be triggered if a factory reports zero or no production data for three consecutive months. Strict criteria will be applied for selecting a replacement factory, ensuring it produces the same item or item group, has a Gross Value Added (GVA) or Gross Value Output (GVO) closer to the original factory, and shares a common operational period.

Currently, the IIP relies on a fixed panel of factories, and closed factories account for about 8.9% of the index's weight, potentially leading to inaccuracies. Under the new methodology, an adjustment factor will be used to reconcile the production data of the substituted factory. Factories temporarily suspending production will not be substituted.

Impact This revision is expected to significantly improve the reliability of the IIP, providing policymakers and investors with a more precise picture of industrial performance. Better data can lead to more effective economic policies and investment strategies. Rating: 8/10

Difficult terms: Index of Industrial Production (IIP): A measure that tracks the short-term changes in the volume of industrial output. It reflects the growth rate of different industry groups of the economy. Base Year: A reference year used for comparison to calculate economic growth rates or index values. The IIP's base year is being shifted to 2022-23. Gross Value Added (GVA): A measure of the value added to a commodity or service, calculated as the total value of output minus the value of intermediate consumption. Gross Value Output (GVO): The total value of goods and services produced by a firm or industry. Laspeyres index methodology: A method of calculating an index number that uses the weights from the base period. It tends to overstate inflation or growth. Source Agency: An entity that provides the primary data for compilation, in this case, for the IIP.