Government Proposes Major Overhaul of IIP to Reflect Factory Closures

The Indian government, through its Ministry of Statistics and Programme Implementation (MoSPI), has proposed a significant overhaul of the methodology used to calculate the Index of Industrial Production (IIP), a critical indicator of industrial growth and economic activity. The proposed changes are primarily aimed at addressing challenges arising from factory closures and production irregularities, which have affected the accuracy and continuity of IIP measurements. The IIP, alongside the Consumer Price Index (CPI), is one of the key monthly economic indicators monitored closely by policymakers to gauge the trajectory of the Indian economy and make informed policy decisions.

According to a discussion paper released by MoSPI, the revision would involve substituting non-operational factories with active ones in the pool of facilities considered for computing the IIP. Currently, the IIP includes several factories that have either ceased production permanently or failed to report production data for prolonged periods. Specifically, the ministry proposed that if a factory producing a particular product reports zero production or fails to provide production data for three consecutive months, a formal status verification would be undertaken. If it is confirmed that the factory has permanently shut down or switched to manufacturing a different product, it would be removed from the sample and replaced with another operational facility. This approach ensures that the IIP reflects the current realities of industrial output rather than outdated or irrelevant production data.

The discussion paper also highlighted that closed factories currently account for approximately 8.9% of the IIP, a figure that creates several methodological and statistical challenges. Including non-operational units in the index necessitates heavy reliance on estimation or imputation methods to fill gaps in production data, which can reduce the reliability of the index. Such dependency complicates the process of maintaining continuity in the IIP series, potentially affecting economic analysis and policy formulation. By updating the sample to include only active factories, MoSPI aims to improve the accuracy and robustness of the IIP while maintaining continuity and comparability with historical data.

The IIP is a high-frequency indicator that reflects industrial performance across manufacturing, mining, and electricity sectors, while the CPI measures retail price movements and forms the basis for calculating headline inflation. Both these indicators are critical tools for policymakers, analysts, and economists, who rely on them to understand trends in industrial activity, production efficiency, and overall economic health. Therefore, ensuring that the IIP is calculated using accurate and up-to-date data is crucial for economic planning, inflation monitoring, and investment decision-making.

MoSPI has invited public feedback on the proposed changes by November 25, emphasizing the importance of broad consultation to ensure that the final methodology is well-informed, robust, and widely supported. By allowing stakeholders, industry representatives, and researchers to review and comment on the proposal, the ministry aims to develop a system that better reflects the current state of industrial production in India while maintaining statistical rigor.

Overall, the proposed overhaul of the IIP methodology represents a proactive step to align industrial statistics with ground realities. By replacing non-operational or misrepresentative factories with active ones, the government seeks to improve the reliability of this key economic indicator, reduce dependence on estimations, and provide policymakers with more precise and actionable data on the performance of India’s industrial sector. The reform is expected to strengthen economic analysis, facilitate better policy formulation, and ensure that the IIP continues to serve as a trustworthy measure of industrial growth in India.