To make the Index of Industrial Production (IIP) more robust and policy-relevant, the government on Tuesday proposed a new methodology for substitution of factories which have been permanently closed or have changed the production line in the new series of IIP.
The new series, scheduled to be released on May 28 next year, will have 2022-23 as base year. The current IP series has 2011–12 as the base year.
The Ministry of Statistics and Programme Implementation (MoSPI) released a discussion paper for the substitution of factories inviting views and suggestions from all stakeholders.
According to the paper, the substitution process will be triggered if a factory reports zero production or if the production data is not reported by the factory for three consecutive months. The substitution will be implemented once the closure/change in production-line is officially confirmed by the source agency.
The factory for substitution will be selected from the latest data of Annual Survey of Industries (ASI) on the basis of a defined criteria. According to MoSPI, the new factory must produce the same item or item group which the original factory was producing, the Gross Value Added (GVA) or Gross Value Output (GVO) of the new factory to be nearer to original factory and a common operation period of 12 months with the old factory are the mandatory criteria.
Currently, the compilation of IIP relies on a fixed panel of factories selected based on the base year to represent industrial activity across various sectors. In the current series the weight of the closed factory comes to about 8.9% of the index.
Under the new methodology, adjustment factor will be used to adjust the production data of the substituted factory, which will be calculated by dividing average 12 overlapping months production of new factory by the average production of old factory for the same period. “Twelve months of overlapping production data from the replacement unit are required for incorporation into the index. Until such overlapping data are obtained, ‘nil’ or imputed values may temporarily be used in the series,” the government said.
In cases where a factory temporarily suspends production, it will not be substituted in the IIP panel.
“Experts feel that since IIP is a volume index weighted by base year GVA or GVO shares using a Laspeyres index methodology, it may inaccurately capture true production in instances where factories may change their production lines or fold up and be replaced by newer production capacities, the MoSPI said.
The concerns regarding factory closures and the consequent need for substitution were also raised by the State Directorates of Economics and Statistics (DES), which compile the State-level IIP.
The IIP measures short-term changes in the volume of industrial output, serving as a key indicator of activity in the mining, manufacturing, and electricity sectors. Released monthly by MoSPI, it also disseminated indices on use -based categories viz. primary goods, capital goods, infrastructure/construction goods, intermediate goods, consumer durables and consumer non-durables. It is compiled based on production data received from 14 source agencies, covering 407 items/item groups. The industrial output rose at a more-than-expected 4% year-on-year in September, driven by growth in manufacturing.
