Govt Plans Major Overhaul for Index of Industrial Production (IIP)

Source: The post “Govt Plans Major Overhaul for Index of Industrial Production (IIP) ” has been created, based on “Govt Plans Major Overhaul for Index of Industrial Production (IIP)” published in “Indian Express” on 12 November 2025.

UPSC Syllabus: GS Paper -3- Economy

Context: The Index of Industrial Production (IIP) is a crucial indicator that measures the short-term changes in the volume of production of industrial goods. It reflects the health of India’s industrial sector and serves as a key input for policy formulation. Recently, the Ministry of Statistics and Programme Implementation (MoSPI) proposed revising the methodology of IIP calculation, including the substitution of closed factories and updating the base year to 2022–23, to make it more robust and representative of current industrial realities.

Need for Revision in IIP Methodology

1. Outdated Factory Sample: Many factories currently included in the IIP are no longer operational or no longer represent actual production levels, leading to inaccurate estimates.
2. Increased Dependence on Estimations: The closure or inactivity of listed factories forces reliance on imputation methods, reducing data reliability.
3. Economic Structural Changes: India’s industrial structure has changed significantly since the last revision in 2017, making it necessary to capture emerging industries and technologies.
4. Base Year Update: The previous base year (2011–12) does not reflect the recent industrial and technological developments, warranting a shift to 2022–23 for relevance.
5. Improved Policy Accuracy: Policymakers rely on IIP data to assess economic momentum and design interventions; inaccurate data can lead to flawed policy responses.

Process of Substitution of Factories

1. Selection of Comparable Units: A factory can be introduced into the IIP sample if it produces the same item or belongs to the same industrial group as the one being replaced.
2. Comparable Output Value: The gross value added or gross value of output of the new factory must be close to that of the one it replaces, ensuring size similarity.
3. Operational Record: The new factory must be operational for at least 12 months before being included in the IIP sample.
4. Data Requirement: Twelve months of production data prior to the substitution are needed for consistency.
5. Temporary Gaps: Until overlapping data between the old and new factories are available, “nil” or imputed values may be used, which could temporarily affect monthly production figures.

Broader Review of IIP

1. The revision is part of a comprehensive overhaul of the IIP system, last updated in 2017.
2. The new methodology will use 2022–23 as the base year, with revised numbers expected by May 2026.
3. The IIP is based on production data from 14 source agencies, covering 407 items across three major sectors: Mining, Manufacturing and Electricity
4. These items are categorized into six groups: Primary goods, Capital goods, Infrastructure/construction goods, Intermediate goods, Consumer durables and Consumer non-durables.
5. The revision aims to make IIP data more reflective of current industrial capacities and product diversity.

Current Industrial Performance (as per latest data)

1. India’s industrial growth rate as per IIP was 4% in September 2025.
2. In the first half of FY 2025–26, industrial output grew by 3%, compared to 4.1% in the same period of FY 2024–25.
3. The upcoming revision is expected to improve accuracy and reduce estimation errors in such performance reporting.

Significance of the Revision

1. Enhanced Accuracy: Replacing defunct factories ensures that IIP data reflects real-time production activity.
2. Policy Relevance: Reliable industrial data helps policymakers, the RBI, and analysts track growth trends and design interventions.
3. Reduced Dependence on Estimation: Substitution minimizes imputed data use, improving the reliability of official statistics.
4. Updated Industrial Representation: The new base year captures structural shifts such as digital manufacturing, green technologies, and new production processes.
5. Greater Transparency and Robustness: The feedback-based approach ensures that the final methodology is “well-informed, robust, and broadly supported.”

Challenges in Implementation

1. Data Collection Delays: Ensuring uniform and timely reporting from new factories may pose logistical difficulties.
2. Transitional Data Gaps: Temporary “nil” or imputed data may distort short-term industrial growth estimates.
3. Coordination with Source Agencies: Synchronizing data across 14 agencies requires strong institutional coordination.
4. Industrial Volatility: Rapid entry and exit of manufacturing units can complicate the sample’s stability.

Way Forward

1. Strengthen Data Infrastructure: Enhance digital data collection systems for real-time industrial reporting.
2. Regular Methodological Reviews: Conduct periodic updates to prevent large data gaps between revisions.
3. Stakeholder Consultation: Continue engaging with industry associations, economists, and statisticians for transparent methodology design.
4. Integration with Other Indices: Align IIP updates with GDP and CPI revisions to maintain consistency in economic analysis.
5. Capacity Building: Improve the technical capability of statistical staff and data collection agencies to ensure uniform data quality.

Conclusion: The proposed revision of the IIP methodology marks an important step toward ensuring accuracy, credibility, and contemporaneity in industrial data. By replacing outdated factory samples and updating the base year to 2022–23, MoSPI aims to create a more robust and policy-relevant indicator of India’s industrial health. However, timely implementation, data quality assurance, and effective coordination among agencies will be key to the success of this reform.

Question: The Ministry of Statistics and Programme Implementation (MoSPI) has proposed changes in the methodology of calculating the Index of Industrial Production (IIP). Discuss the need, process, and significance of this revision.