IIP growth data is keenly awaited by markets every month. The data is released by the CSO (Central Statistical Office) on the 10th of every month. Why does the market keenly await the IIP data and what does IIP mean for your Investments.
What is IIP Number?
IIP stands for index of industrial production and details the growth of industrial sector in India, which is one of the key indicators to measure economic development in the country. IIP is a short term indicator, which is useful to gauge the rate of industrial growth and given that it is published with a lag of 40 days, IIP provides past trends and not future outlook.
IIP measures the status of production in industrial activity for a given period of time with reference to a chosen base year i.e. 2004-05, which is taken as 100, and used as a reference to calculate the growth (or decline) for the current period.The difference between the current number and the base year number gives a fairly good idea of how much industry has grown.
IIP is compiled using data received from 15 source agencies. (i) Department of Industrial Policy & Promotion (DIPP); (ii) Indian Bureau of Mines; (iii) Central Electricity Authority; (iv) Joint Plant Committee, Ministry of Steel; (v) Ministry of Petroleum & Natural Gas; (vi) Office of Textile Commissioner; (vii) Department of Chemicals & Petrochemicals; (viii) Directorate of Sugar & Vegetable Oils; (ix) Department of Fertilizers; (x) Tea Board; (xi) Office of Jute Commissioner; (xii) Office of Coal Controller; (xiii) Railway Board; (xiv) Office of Salt Commissioner; and (xv) Coffee Board.
Manufacturing contributes to 75.52%, Mining contributes to 14.16% & Electricity contributes 10.32% to the IIP calculation.
The total weight in the new series of all India IIP has been distributed to Mining, Manufacturing & Electricity sectors on the basis of their share of GDP at factor cost during 2004-05 as per the new series of National Accounts Statistics with 2004-05 as base.
From the above table we can see the top contributor to mining sector are Petroleum, Coal, Natural Gas and iron ore,hence if Mining sector is growing we know which sector to look for where production had increased.
The Electricity sector consists of a single item, i.e. total electricity generated.
Under Manufacturing sector there are 22 Sub segments that have 397 items in it, the top items which contribute to Manufacturing are
From the above table we can see that the top contributors to Manufacturing are Cements, Antibiotics, Diesel & Apparel, hence if Manufacturing Data is improving these are the sectors to look for.
The General Index for the month of April 2016 stands at 176.4, which is 0.8 percent lower as compared to the level in the month of April 2015. The cumulative growth for the period April-March 2015-16 over the corresponding period of the previous year stands at 2.4 percent.
Mining, Manufacturing and Electricity sectors for the month of April 2016 stand at 123.6, 182.6 and 203.0 respectively, with the corresponding growth rates of 1.4 percent, (-) 3.1 percent and 14.6 percent as compared to April 2015.
Eight core industries (ECI) is an index, which calculates growth in coal, crude oil, natural gas, refinery products, fertilizers, steel, cement and electricity industries.Since this index is also responsible for 38% of IIP the General Index & Eight Core Industries Index are read in conjunction with each other to cross check the reliability of the two numbers.
Importance of IIP for Markets-
As IIP shows status of Industrial activity, you can find out whether activity has increased, decreased or remained constant. If IIP growth is low, it means lower industrial production and you can then delve further on why industry production is low. Is it because of weak consumer spending, or unavailability of key raw materials or any other reason. Low industrial production result in lower corporate sales and profits, which will directly affect the markets and stock prices and your investments.
Growth in IIP is a good sign for Cement, Steel, Power, Capital Goods & Manufacturing industries. Mining Sector contributes approx 14% to the IIP. Growth figures can indicate how mining companies are going to fare in the coming quarters.
The IIP data doesn’t include the banking sector for its calculation, but if IIP index is increasing it means production is increasing & production and investment activity is usually financed through banks. Hence, if industrial production & capital spending is increasing then it is likely to have a positive impact on the banking sector.