Why in the News?

• The Government of India is preparing for a comprehensive overhaul of the Index of Industrial Production.

What’s in Today’s Article?

• About IIP (Understanding, Components, Rationale Behind Changes, How Changes Will Work, Importance, Challenges, etc.)

Understanding the Index of Industrial Production

• The Index of Industrial Production (IIP) is one of India’s most critical macroeconomic indicators, along with the Consumer Price Index (CPI), which measures retail inflation.
• Released monthly by MoSPI, the IIP captures changes in the volume of production in three sectors, mining, manufacturing, and electricity, based on data from 14 source agencies covering 407 items or item groups.
• The IIP is also classified into six use-based categories:

• Primary goods, Capital goods, Intermediate goods, Infrastructure or construction goods, Consumer durables, Consumer non-durables

• Currently, the IIP uses 2011-12 as its base year, but this is set to be updated to 2022-23 to reflect more contemporary industrial structures and output patterns.

Rationale Behind the Overhaul

• According to MoSPI’s discussion paper released in November 2025, the overhaul was necessitated by a major statistical challenge: the continued inclusion of closed or non-operational factories in the IIP sample.

• Around 8.9% of the IIP’s factory sample reportedly consists of units that have either shut down permanently or stopped producing the assigned goods.
• The presence of such inactive units distorts the industrial growth picture by forcing the ministry to rely on imputation or estimation methods, which reduces the accuracy of data.

• To address this, MoSPI has proposed an automatic substitution mechanism, where factories that remain non-operational or fail to report data for three consecutive months will be replaced with new, active factories of similar scale and output.
• This move, according to the ministry, will maintain the continuity and robustness of the IIP series, ensuring it reflects actual industrial performance rather than estimates.

How the Substitution Mechanism Will Work?

• Under the proposed framework:

• A status check will be initiated if a factory reports zero production for three consecutive months.
• Upon confirmation that the unit is permanently closed or no longer produces the assigned item, it will be removed from the sample.
• A new factory producing the same or equivalent item will be added, provided:
• It has been operational for at least 12 months.
• Its Gross Value Added (GVA) or output value is comparable to the replaced factory, ensuring size consistency.

• Until overlapping data between the old and new factories is established, temporary ‘nil’ or imputed values may be used, leading to a short lag before substitution is fully reflected in the IIP.
• This substitution system aligns India’s statistical practices with international standards, as similar procedures are followed by advanced economies to ensure the reliability of industrial indices.

Updating the Base Year to 2022-23

• The overhaul is also part of a broader review of the IIP, with MoSPI planning to shift the base year from 2011-12 to 2022-23. The last revision took place in 2017, and the decade-long gap has made the index less reflective of the current industrial ecosystem.
• The updated base year will incorporate:

• Newly emerging industries such as electric vehicle manufacturing, semiconductors, and green technologies.
• Changes in product composition and weightage to capture shifts in consumer demand and industrial output.
• Integration of digital data sources to reduce manual reporting delays.

• This recalibration will ensure that the IIP remains relevant and aligned with India’s rapidly evolving industrial landscape.

Importance of IIP in Economic Policy

• The IIP serves as a crucial indicator for policymakers, investors, and analysts to gauge short-term industrial trends. It influences decisions on:

• Monetary policy: The RBI uses IIP data alongside inflation and employment indicators to assess economic health.
• Fiscal planning: Government agencies rely on IIP trends to forecast tax revenues, employment potential, and infrastructure requirements.
• Private sector investment: Businesses use IIP data to identify growth sectors and assess market demand.

• As of September 2025, India’s industrial output grew by 4% year-on-year, while growth for the 1^st half of FY2025-26 stood at 3%, slightly lower than the 4.1% recorded in the corresponding period last year.
• These figures highlight the need for a more responsive and accurate statistical system that reflects real-time industrial performance.

Challenges and the Way Forward

• While the proposed substitution mechanism promises greater accuracy, it also presents challenges:

• Timely verification of factory status will require close coordination between state statistical offices and industry bodies.
• Maintaining comparability between replaced and new units will be crucial to prevent statistical distortions.
• Data lags may persist during the transition period as overlapping production data is compiled.

• To ensure a smooth transition, MoSPI has sought public feedback on the proposed methodology by November 25, 2025, aiming for a consensus-driven and technically robust framework.