What does the new 2011-12 IIP series tell about the Indian manufacturing sector?

Abstract

PurposeThis paper aims to discuss the changes in the new 2011-12 base year series of the Index of Industrial Production (IIP) to determine whether the new series has improved the understanding of the growth in the manufacturing sector.Design/methodology/approachThis paper develops a simple framework to separately estimate the contribution of value- and volume-based commodities in the growth of the manufacturing index. The authors present a case study by analysing the growth performance of IIP drugs and pharmaceuticals sector by comparing it with real net sales of a common sample of firms in this segment.FindingsThe authors find that growth in value-based commodities contributes significantly in moving the index in either direction, and that high growth in value-based commodities coincides with periods of low inflation. On comparability, using real net sales as an alternate indicator of industrial output for the pharmaceuticals sector, the authors find that IIP and real net sales show contrasting trends, thereby raising issues of reliability. The authors also find that the IIP shows a disconnect with growth rates from Annual Survey of Industries for several industries.Practical implicationsThe divergence between two measures of industrial activity raises crucial questions on the representativeness of the IIP.Originality/valueThe study builds a framework to separately estimate the contribution of value- and volume-based commodities in the growth of the manufacturing index.