GS PAPER II: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Context: India’s retail inflation slowed to a three-month low of 4.29% in April, from 5.52% in March, helped by softer food prices as well as a base effect.

• Index of Industrial Production (IIP) being significantly lower on account of the national lockdown to contain COVID-19 imposed that month, data from the National Statistical Office showed.
• The March IIP data showed manufacturing grew by 25.8% and electricity generation by 22.5% over the year-earlier period, when industrial activity had collapsed 18.7% in the wake of the COVID-19 lockdown.

Little room for rate cuts

• Most economists expect the RBI to remain accommodative, but don’t see much room for rate cuts.
• Focus has returned to inflation in light of the recent rally in commodity prices as well as rising input prices faced by manufacturers.

Consumer Price Index

• Inflation can be described as the general rise in the price of goods and services in an economy over time.
• It’s calculated by tracking the increase in prices of essentials.
• The primary index that tracks the change in retail prices of essential goods and services consumed by Indian households is the Consumer Price Index or CPI.
• The index assigns different weights to various goods and services in the basket and tracks the movement of their prices.
• It also tracks the price movement of the entire basket on a pan-India level to calculate the overall inflation figure or CPI inflation.
• CPI is not the cost of living index, and is, therefore, not an accurate reflection of consumer spending.
• The weightage of food in the CPI is close to 50%, but most households don’t spend nearly that much of their overall expenditure on food.
• What we spend more on are services such as education, health care and transportation, where inflation levels are much higher.

What is WPI?

• The other index that measures inflation is the Wholesale Price Index (WPI).
• While retail inflation looks at the price at which the consumer buys the product, WPI is measured based on prices at the wholesale level.
• There are two layers between the wholesale price and retail price, one is the additional cost of transportation from the wholesale to the point of sale, and the other is the retail mark-up.
• During the lockdown, for instance, it was more difficult to transport goods, and that additional cost got added to individual prices.
• Another difference between the two indices is that the wholesale market is only for goods. So WPI does not include services, whereas the retail price index does.
• The pricing norms of wholesale and retail are also different.
• Certain items on WPI, such as fuel, are also closely linked to international prices, creating a gap between the figures on this index and the CPI.
• While CPI is the most relevant index for the consumer as it shows the increase in their actual outgo, it is not a completely accurate cost of living indicator since it focuses on certain goods and services more than others.
• The net effect of inflation is that the value of your money decreases over time, so make sure to align and diversify your investments so that you can inflation-proof your corpus.

Index of Industrial Production data or IIP

• It is an index that tracks manufacturing activity in different sectors of an economy.
• The IIP number measures the industrial production for the period under review, usually a month, as against the reference period.
• IIP is a key economic indicator of the manufacturing sector of the economy.
• There is a lag of six weeks in the publication of the IIP index data after the reference month ends. IIP index is currently calculated using 2011-2012 as the base year.

IIP Index Components:

• Electricity, crude oil, coal, cement, steel, refinery products, natural gas, and fertilisers are the eight core industries that comprise about 40 percent of the weight of items included in the Index of Industrial Production.
• Mining, manufacturing, and electricity are the three broad sectors in which IIP constituents fall.

Who releases Index of Industrial Production or IIP data?

• In the case of Index of Industrial Production India, IIP data is compiled and published by CSO every month.
• CSO or Central Statistical Organisation operates under the Ministry of Statistics and Programme Implementation (MoSPI).

Who uses IIP data?

• The factory production data (IIP) is used by various government agencies such as the Ministry of Finance, the Reserve Bank of India (RBI), private firms and analysts, among others for analytical purposes.
• The data is also used to compile the Gross Value Added (GVA) of the manufacturing sector in the Gross Domestic Product (GDP) on a quarterly basis.

IIP base year change:

• The base year was changed to 2011-12 from 2004-05 in the year 2017.
• The earlier base years were 1937, 1946, 1951, 1956, 1960, 1970, 1980-81, 1993-94 and 2004-05.

Where is IIP data sourced from?

• The CSO uses secondary data to reach the monthly IIP number.
• The data is sourced from various agencies in different ministries or departments of the government.
• The Department of Industrial Policy and Promotion (DIPP) is the source for the major chunk of data for the calculation.

IIP vs ASI

• While the IIP is a monthly indicator, the Annual Survey of Industries (ASI) is the prime source of long-term industrial statistics.
• The ASI is used to track the health of the industrial activity in the economy over a longer period.
• The index is compiled out of a much larger sample of industries compared to IIP.

https://www.thehindu.com/business/Economy/inflation-eases-to-429-base-lifts-iip/article34545529.ece?homepage=true