Quantity indices: IIP, its classifications and other indices

Detail

1. What a quantity index is

• A price index (CPI, WPI) tracks how prices change. A quantity index tracks how physical output (volume) changes.
• Quantity relative is this year's output of a good divided by 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.

• A quantity index is a weighted average of many such quantity relatives.

2. Index of Industrial Production (IIP): the basics

• IIP is a monthly quantity index. It measures short-term changes in the volume of industrial output.
• Compiled by: the National Statistics Office (NSO) in the Ministry of Statistics and Programme Implementation (MoSPI) [2].
• Official definition: IIP is "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].
• Base year means the reference year. Its index is set to 100, and every later month is compared with it [2].

3. The formula: Laspeyres, with value-added weights

• Laspeyres formula means the weights are fixed at base-year values and do not change each month.
• NCERT form:
• IIP₀₁ = Σ(q₁ᵢ Wᵢ) / ΣWᵢ × 100
• q₁ᵢ = quantity relative of good i (current output ÷ base output)

• Wᵢ = weight of good i, based on its value added in the base year

• MoSPI form for the new series: Lₜ = ΣWᵢRᵢ / ΣWᵢ, where Rᵢ = Pᵢ,ₜ / Pᵢ,₀ (production in the current period ÷ production in the base period). MoSPI calls this a "Laspeyres fixed base type index" [2].

• 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

• So industrial output rose 2% over the base. Steel's rise outweighs cement's fall because steel has the bigger weight.

• How weights are set in the new series (2022-23 base) [2]:

• Sector weights come from each sector's share in Gross Value Added (GVA) at current prices in 2022-23, taken from the National Accounts (base 2022-23). 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) according to their GVA in the Annual Survey of Industries (ASI) 2022-23.

• At the item level, weights follow each item's share of Gross Value of Output (GVO).

• It is not a pure quantity index. MoSPI uses a hybrid approach [2]:

• For uniform goods (such as cement), it records volume.
• For mixed goods, or goods whose quality changes, it records value. For goods that take more than a month to make, such as ships, it records the value of work in progress.
• These value figures are turned into volumes with the WPI as deflator (a price index used to strip out price change). MoSPI plans to switch to an Output Producer Price Index (PPI) once that index proves stable [2]. This is a direct link between IIP and the price indices in this topic.

4. Base year and why it keeps changing

• NCERT: the base has been 2011-12 = 100 since April 2017.
• Current fact: MoSPI has moved the IIP base from 2011-12 to 2022-23 to reflect the current structure of industry [6]. The first IIP of the new series was released by press release [4]. MoSPI had planned the launch for 1 June 2026 [2]. (NCERT: 2011-12 base.)
• Why 2022-23? The base year should be a fairly stable year. It should also 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. The first IIP used base 1937. Later bases were 1946, 1951, 1956, 1960, 1970, 1980-81, 1993-94, 2004-05 and 2011-12 [2].
• Why bases change often (NCERT): every year some items stop being made or lose importance, and new items appear. The new series shows this clearly [2]:
• 463 item groups (old series: 407). 120 are new and 64 were dropped.
• Added: debit and credit cards with magnetic stripe, CCTV cameras, stents, vaccines, parts of aircraft and spacecraft.

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

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

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

5. Coverage by sector

• NCERT weights (2011-12 series, MoSPI 2016-17): Mining 14.4, Manufacturing 77.6, Electricity 8.0. Manufacturing has the largest weight.
• New series (2022-23) changes [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 supply 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 using NIC 2025 (National Industrial Classification, the official code list of industries).
• Chain-linked indices (where weights are updated every year) are to be tested internally first. A seasonally adjusted IIP will come only after enough years of data are available [2].

6. Use-based classification

• The use-based classification groups goods by their end use, meaning who uses the good and for what. The six categories continue in the new series, but the placing of individual items was reviewed [2].

Use-based group	Weight (2011-12)	Meaning [2]	Examples [2]	What it signals
Primary goods	34.1 (largest)	Taken directly from nature and used for further processing	Ores and minerals, fuels (diesel, ATF, petrol, LPG), electricity	Supply-chain inputs
Capital goods	8.2	Used to produce other goods, but not used up as inputs	Boilers, compressors, tractors, transformers, commercial vehicles, machinery	Investment (capex) cycle
Intermediate goods	17.2	Unfinished goods that become part of another product	Cotton yarn, plywood, steel pipes, auto parts	Production chains, Global Value Chains
Infrastructure/construction goods	12.3	Finished goods used mainly in building and infrastructure	Cement, paints, cables, bricks, rail materials	Public capex and housing
Consumer durables	12.8	Consumer goods that last more than about 1 year	ACs, cars, two-wheelers, mobile phones, TVs, gold jewellery	Discretionary demand and confidence
Consumer non-durables	15.3	Consumer goods for immediate use that cannot be kept long	Edible oil, milk, atta, rice, sugar, tea, medicines	Mass and rural consumption

• How to read the signals:
• Consumer non-durables weak → households are cutting even basic spending → a sign of rural or mass-consumption stress. Most of this demand is non-discretionary (people must buy it), so a fall here is serious [2].
• Consumer durables weak → people are putting off big purchases → weak discretionary demand (spending people can choose to delay).
• Capital goods rising → firms are buying machines → they are adding capacity → private investment is reviving.

• Infrastructure/construction goods rising → cement and steel demand is up → government capex and housing are strong.

• Trap: by sector, manufacturing is the largest (77.6). By use-based group, primary goods are the largest (34.1).

7. Eight core industries and the Index of Core Industries (ICI)

• The eight core industries are coal, crude oil, natural gas, refinery products, fertilisers, steel, cement and electricity. They are basic inputs that most other industries depend on.
• Weight: together they make up 40.27% of the items in the IIP (2011-12 base) [3].
• Index of Core Industries (ICI): it measures the combined and individual production of these industries [3]. It 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).
• New series: the first ICI with base year 2022-23 has been released [5]. Secondary reports (July 2026) say two things (verify against the PIB release):
• Iron ore was added, making it nine core industries.

• Their combined IIP weight is now 32.88% (NCERT/old series: eight industries, 40.27%).

• Details are in industrial-policy-psu-msme.

8. Other indices (Class 11, Index Numbers)

• Agricultural production index: a ready reckoner (quick check) of how the farm sector is doing. Related indices cover the area, production and yield of principal crops.
• Index of foreign trade: India publishes two kinds.
• Unit-value index: tracks the average price per unit of exports and of imports.
• Quantity index: tracks the volume of exports and of imports.
• Unit-value indices are used to compute terms of trade: how many imports one unit of exports can buy.
• Net barter terms of trade = (unit-value index of exports ÷ unit-value index of imports) × 100.

• Example: export unit value is 120 and import unit value is 100. Terms of trade = 120, so they have improved. The same exports now buy 20% more imports.

• Sensex: the BSE Sensitive Index, base 1978-79 = 100, 30 stocks from 13 sectors. It is a value (price) index of shares, not a quantity index. Details are in financial-markets-instruments.

• HDI (Human Development Index): a composite development index, built by combining several indicators. Details are in development-and-hdi.
• Where to find these: the Economic Survey publishes WPI, CPI, the index of yield of principal crops, IIP and the index of foreign trade.
• Where to find IIP data now: MoSPI press releases and the e-Sankhyiki portal [2]. The new series releases IIP 28 days after the reference month [2].

Prelims Hooks

• IIP is compiled by NSO, MoSPI. The Index of Core Industries is compiled by OEA, DPIIT. Examiners often swap these two.
• IIP uses the Laspeyres fixed-base formula: Lₜ = ΣWᵢRᵢ/ΣWᵢ, with base-year weights [2].
• IIP base has moved from 2011-12 to 2022-23. This is the 10th revision. The first IIP base was 1937 [2].
• The new IIP adds Gas Supply and Water Supply, Sewerage & Waste Management. Mining now includes minor minerals and a 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 reported in value terms are deflated with the WPI. MoSPI plans to shift to the Output PPI [2].
• Largest weight: by sector, manufacturing (77.6). By use-based group, primary goods (34.1). These figures are for the 2011-12 series.
• The eight core industries carry 40.27% of IIP weight in the 2011-12 series [3]. The new-series figure is reported as 32.88% with nine industries including iron ore (verify).
• Terms of trade are worked out from the unit-value indices of exports and imports, not from the quantity indices.
• Sensex: base 1978-79 = 100, 30 stocks.

Mains Points

• IIP as a policy dashboard:
• Use-based data splits industrial growth into three parts: consumption (durables and non-durables), investment (capital goods) and public capex (infrastructure goods).
• Example: strong infrastructure goods but weak capital goods means growth is led by the government, while private investment is still lagging.

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

• Base revision and the credibility of data:

• The 2022-23 base matches the new GDP series [7]. It adds new-economy items and renewable power [2].
• This fixes 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 for data quality (GS-III, statistical reform) [2].

• Measurement limits:

• The hybrid quantity/value method depends on the WPI deflator. If the WPI misreads prices, real output is misread too [2].
• IIP covers mainly the organised/factory sector (the item basket is drawn from ASI). So it may miss MSME and informal-sector stress.

• As a result, IIP and GVA-manufacturing figures can differ.

• Core industries as a lead indicator:

• The ICI arrives earlier and carries a large share of the IIP weight [3].
• This makes it useful for nowcasting (estimating current output before full data arrives) and for spotting infrastructure bottlenecks early (power, coal, steel).