IIP: Index of Industrial Production: Meaning, implication, impact on Rupee-strength

On repeated requests by multiple readers, here it goes

Introduction

When we say economy is booming or industry is facing a slump: how do we know? Mere by perception? But Government or Banks or investors cannot make their policies and decisions on perception, they need some quantifiable data to work on. Hence they need IIP (index of Industrial production). It is a number, that gives you idea on how industries are performing.


Suppose industrial output of India, in the year 2004-05 was 100 crore rupees.
In 2010-11 it is 105 crore rupees.
So simple percentage calculation: 5% increase in the industrial output over the base year.
Newspaper headline: IIP shows growth of 5%.

For this ‘industrial output’ value, we’ve to measure the output in three sectors (MEM)
1.    Mining
2.    Electricity
3.    Manufacturing
Then we take out the weighted arithmetic mean and that is our ‘industrial output’ value. Then do all the index calculation of current year and baseyear.

Meaning

•    It is a single representative figure to measure the general level of industrial activity in the economy.
•    It measures the absolute level and percentage growth of industrial production.

Who calculates this IIP?

•    Central Statistical  Organisation  (CSO) under the Ministry of statistics and program implementation.

When do they calculate this IIP?

Every month.

Why do they calculate it every month?

Because if they calculate every year, it’ll be too late for the Government or RBI to make necessary amendments in the policy ! They’ve to keep a constant eye on this number.

For example
1.    Automobile sector is facing very negative growth, Government may give them tax-holidays or allow them to import foreign machinery without paying import tax. [Fiscal Policy]
2.    Negative IIP may mean People don’t have money in their hands, so they’re not purchasing products (less demand) hence industry had to reduce the production or Businessman are having hard time borrowing because of high interest rates. = Change the repo, reverse repo CRR etc to increase money supply in people’s hands. [Monetary Policy]

What are other ‘Indexes’?

1.    Wholesale price index (WPI)

2.    Consumer price index (CPI): four subparts

a.    Industrial Workers (CPI-IW)

b.    for Agricultural Labourers (CPI-AL);

c.    for Rural Labourers (CPI -RL)

d.    for Urban Non-Manual Employees (CPI-UNME).

What is the impact of poor Industrial Production?

As a job seeker

•    Lower demand will force businesses to invest less and scale back expansion plans. That means lower hiring.
•    So, if you’re looking for a job in the manufacturing/industrial sector, expect the going to get a little bit tougher.

As a stock investor

•    Lower industrial output means lower revenues and profits (which are also getting hit by higher borrowing costs). That lowers earnings per share for investors
•    continuation of the poor IIP trend could lead to more earnings downgrades and lower stock valuations. Means FIIs start pulling their money out of India and invest it in different country   = leads to weakening of rupee.(more below)

As a shopper

•    manufacturers to offers discounts and freebies, to attract shoppers to stores.
•    Of course, shoppers will only be inclined to spend if they still have jobs or enough disposable income.

As a borrower

•    RBI may lower the rates, to increase the money supply in the market and make borrowing easier.

As a producer/exporter:

•    businesses using locally-priced inputs, there might be a silver lining in terms of costs, which could come down.
•    if the prices of those inputs are based on international prices, they might not be so lucky because a falling rupee will increase prices in local terms.
Now some real life examples
End of rephrasing, now writing further on my own.

IIP for October'11 : Rupee weakens

• had negative growth (-5 .1 percent).
• (This data was released in Dec'11)
• It sent panic among investors and SENSEX fell by 343 points.
• FIIs started pulling out money from our stock-market, they'd sell their stock-get rupees, get them converted into dollars and invest it elsewhere in different country.
• You get the picture: Demand of dollar$ increase and demand of rupee decrease hence the rupee made a new lifetime low of 52.** against the dollar

IIP for December 2011

• Very low +1.8 growth (In Dec'10 it was 8.1%!)
• This data was released in Feb'12.

FII

• in crude terms, it is the foreign investors who invest money in Indian stock-market.
• They pull out their money immediatly if they see problem.