Index of Industrial Production

Also called: IIP · Topic: Inflation and Index Numbers: CPI, WPI, IIP and the Deflator · NCERT: Class 11, Ch 7 "Index Numbers"

Meaning

The Index of Industrial Production (IIP) is a monthly quantity index (an index that tracks physical output, not prices). It measures short-term changes in the volume of industrial output compared with a base year, whose index is set at 100. The National Statistics Office (NSO), part of the Ministry of Statistics and Programme Implementation (MoSPI), compiles it [2]. MoSPI defines it as "a composite indicator designed to measure the changes in the volume of the production of item basket over a period of time with respect to its base year" [2].

• It is the quickest monthly guide to whether factories, mines and power plants are producing more or less. That makes it a key input for judging growth, demand and investment.
• Formula (Laspeyres fixed base type index) [2]:
• Lₜ = ΣWᵢRᵢ / ΣWᵢ, where Rᵢ = Pᵢ,ₜ / Pᵢ,₀ (production of item i in the current period ÷ production in the base period), and Wᵢ = the base-year weight of item i.
• NCERT form: IIP₀₁ = Σ(q₁ᵢ Wᵢ) / ΣWᵢ × 100. Here q₁ᵢ is the quantity relative and Wᵢ is the weight based on value added in the base year.

Explanation

How the index is built

• Quantity relative: this period's output of a good ÷ its base-year output × 100.

• Example: steel output is 100 lakh tonnes in the base year and 110 lakh tonnes now. The quantity relative is 110.

• The IIP is a weighted average of hundreds of such quantity relatives.

• Laspeyres formula means the weights are fixed at base-year values. They do not change from month to month.
• How weights are set in the new series (2022-23 base) [2]:
• Sector weights: each sector's share in Gross Value Added (GVA) at current prices in 2022-23, taken from the National Accounts. GVA is the value of output minus the value of inputs used up.
• Inside manufacturing: weights go down to industry groups (NIC 2-, 3- and 4-digit) based on their GVA in the Annual Survey of Industries (ASI) 2022-23.
• Item level: weights follow each item's share of Gross Value of Output (GVO).

Worked example (two goods):

Good	Base output	Current output	Quantity relative	Weight
Steel	100	110	110	60
Cement	50	45	90	40

• IIP = (110×60 + 90×40) / (60+40) = (6,600 + 3,600) / 100 = 102
• Industrial output is 2% above the base.
• Cement fell, but steel rose, and steel has the bigger weight. So the total rose.

It is not a pure quantity index: the hybrid method

MoSPI uses a hybrid approach [2]:

• Uniform goods (such as cement): volume is recorded directly.
• Mixed goods, or goods whose quality changes: value is recorded.
• Goods that take more than a month to make (such as ships): the value of work in progress is recorded.
• Converting value into volume:
• Value figures include price changes.
• MoSPI divides them by the WPI, which acts as a deflator (a price index used to remove price change).

• What remains is real volume.

• MoSPI plans to switch to an Output Producer Price Index (PPI) once that index proves stable [2].

Components: sector-wise and use-based

By sector:

• NCERT weights (2011-12 series):
• Mining: 14.4
• Manufacturing: 77.6, the largest

• Electricity: 8.0

• New series (2022-23) [2]:

• It keeps Mining, Manufacturing and Electricity.
• It adds Gas Supply and Water Supply, Sewerage & Waste Management.
• Mining now covers 34 major minerals (under the Mineral Conservation and Development Rules, MCDR), 1 rare earth mineral and 9 minor minerals.
• Electricity is split into renewable and non-renewable generation, each with its own index.
• Water and sewerage are measured through tap and sewer connections in 500 AMRUT cities. Waste is measured as the quantity collected and processed.
• Indices are published by industry under NIC 2025 (National Industrial Classification, the official code list of industries).

By use (end use: who uses the good and for what). All six groups continue in the new series [2]. Weights below are for the 2011-12 series.

Use-based group	Weight	Examples [2]	What it signals
Primary goods	34.1 (largest)	Ores, minerals, diesel, petrol, LPG, electricity	Input supply
Capital goods	8.2	Boilers, tractors, transformers, machinery	Private investment (capex) cycle
Intermediate goods	17.2	Cotton yarn, steel pipes, auto parts	Production chains
Infrastructure/construction goods	12.3	Cement, paints, cables, bricks	Public capex and housing
Consumer durables	12.8	ACs, cars, two-wheelers, mobile phones	Discretionary demand (spending people can delay)
Consumer non-durables	15.3	Milk, atta, sugar, medicines	Mass and rural consumption

What makes the use-based readings rise or fall:

• Capital goods rising:
• Firms are buying machines.
• They are adding capacity.

• Private investment is reviving.

• Consumer non-durables weak:

• Households are cutting even basic spending.
• This points to rural or mass-consumption stress.

• It is serious because this demand is mostly non-discretionary (people must buy these goods) [2].

• Infrastructure goods rising: demand for cement and steel is up, which means government capex and housing are strong.

Why the base year keeps changing

• Every year some items stop being made or lose importance, and new items appear.
• New series (2022-23) [2]:
• 463 item groups (old series: 407). 120 were added and 64 were dropped.
• Added: stents, vaccines, CCTV cameras, debit and credit cards with magnetic stripe, parts of aircraft and spacecraft.

• Dropped: kerosene, fluorescent tubes and CFLs, sewing machines, printing machinery.

• Linking factor [2] joins the old series to the new one, so long-run trends can still be compared:

• Linking factor = geometric mean (GM) of the old series in the new base year ÷ GM of the new series in the new base year.
• Example: the old series averages 150 (GM) in 2022-23 and the new series is 100. The linking factor is 1.5, so a new-series reading of 110 equals 165 on the old base.

In India

• Compiled by: NSO, MoSPI [2]. Data comes out through MoSPI press releases and the e-Sankhyiki portal [2].
• Release lag: the new series releases IIP 28 days after the reference month [2].
• Base year:
• NCERT uses the 2011-12 = 100 base, in use since April 2017.

• MoSPI has now moved the base from 2011-12 to 2022-23 [6]. MoSPI had planned the launch for 1 June 2026 [2]. The first IIP of the new series was issued by press release [4].

• Why 2022-23?

• The base should be a fairly stable year.
• It should match the base of other big indicators such as GDP and WPI [2].

• The GDP series also moved to a 2022-23 base, released on 27 February 2026 [7].

• History: this is the 10th revision of the IIP base [2].

• The first IIP used base 1937.

• Later bases were 1946, 1951, 1956, 1960, 1970, 1980-81, 1993-94, 2004-05 and 2011-12.

• Link to core industries:

• The Index of Core Industries (ICI) is compiled by the Office of the Economic Adviser (OEA), DPIIT.
• It comes out before the IIP, so it works as a lead indicator (an early signal of where IIP is heading).
• In the 2011-12 series, the eight core industries carry 40.27% of the IIP weight [3]: coal, crude oil, natural gas, refinery products, fertilisers, steel, cement and electricity.

• The first ICI on the 2022-23 base has been released [5]. Secondary reports (July 2026) say iron ore was added, making nine industries, with a combined weight of 32.88%. Verify this against the PIB release.

• Coming next: chain-linked indices (weights updated every year) will first be tested internally. A seasonally adjusted IIP will come only after enough years of data are available [2].

Don't confuse with

• WPI / CPI: these are price indices that track how prices change. IIP is a quantity index that tracks how output volume changes. (The WPI does enter the IIP, but only as a deflator for items recorded in value terms [2].)
• Index of Core Industries (ICI): it is compiled by OEA, DPIIT, not NSO, MoSPI. It covers only the core industries and is released before the IIP [3].
• Largest sector vs largest use-based group: by sector, manufacturing is the largest (77.6). By use-based group, primary goods are the largest (34.1). Both figures are for the 2011-12 series.
• Quantity index of foreign trade: it tracks the volume of exports and imports, not industrial output. Terms of trade are worked out from the unit-value indices, not from quantity indices.

Prelims Hooks

• IIP is compiled by NSO, MoSPI. ICI is compiled by OEA, DPIIT. Examiners often swap the two.
• Formula: Laspeyres fixed base type index, Lₜ = ΣWᵢRᵢ/ΣWᵢ, with base-year weights [2].
• Base moved from 2011-12 to 2022-23. This is the 10th revision, and the first base was 1937 [2].
• The new IIP adds Gas Supply and Water Supply, Sewerage & Waste Management. Mining now includes 9 minor minerals and 1 rare earth mineral [2].
• The new IIP has 463 item groups (old: 407), with 120 added and 64 dropped. Kerosene and sewing machines are out. Stents and CCTV cameras are in [2].
• Items recorded in value terms are deflated with the WPI, with a planned shift to the Output PPI [2]. So IIP is a hybrid index, not a pure quantity index.

Mains Points

• IIP as a policy dashboard:
• The use-based split shows what is driving industrial growth: consumption (durables and non-durables), private investment (capital goods) or public capex (infrastructure goods).
• Example: strong infrastructure goods but weak capital goods means growth is led by the government, while private investment still lags.

• The RBI and the Finance Ministry can use this to judge whether public spending is pulling in private investment.

• Base revision and data credibility (GS-III):

• The 2022-23 base matches the new GDP series [7]. It adds new-economy items and renewable power [2].
• This removes the old basket's bias towards goods that are no longer made.

• A fixed-weight Laspeyres index still goes out of date between revisions. That is why MoSPI's work on chain-linking matters [2].

• Measurement limits:

• The hybrid method depends on the WPI deflator. If the WPI misreads prices, real output is misread too [2].
• The item basket is drawn mainly from the organised factory sector (ASI). So IIP may miss stress in MSMEs and the informal sector.
• As a result, IIP and GVA-manufacturing figures can differ.
• The ICI arrives earlier, so it helps with nowcasting (estimating current output before full data arrives) and with spotting bottlenecks in power, coal and steel early [3].

Related concepts

• Use-based classification of IIP
• Agricultural production index
• Index of foreign trade

Read more

• Quantity indices: IIP, its classifications and other indices