Index Numbers in Industrial Production

An index number is a statistical measure designed to show changes in variables or a group of related variables with respect to time, geographic location or other characteristics of the variable under study.  It is referred to as a measure of change, a device to measure change or a series representing the process of change.  Index numbers are used as a barometer to indicate the changes in economic activity.  They also provide a framework for decision making and to forecast future events.  There are three types of index numbers which are generally used, viz. price index, quantity index and value index.  These are either developed by aggregate method or by average of relatives method.  Although there are many problems related to developing an index, it is a handy device to measure or compare changes in economic variables over a period of time.

 

The important index numbers used in the Indian Economy are :-

 

Index Number of Wholesale Price

 

This index number is based on seven commodity groups –

 

1. food items
2. liquor and tobacco
3. fuel, power, light and lubricants
4. industrial raw materials
5. chemical items
6. machinery and transporting equipments
7. manufactured goods divided into two categories, viz. intermediate products and finished products

 

Price quotations are collected for all the seven commodity groups from some pre-decided markets on every Friday.  The quotations for the wholesale prices are obtained from a number of markets and weights are assigned to these groups.  The commodity index number is found by taking simple arithmetic mean of price relatives based on the price quotations from different markets.  The weighted arithmetic mean of these items is taken to get a group index number and the weighted arithmetic mean of these group index numbers provide the index number for wholesale prices.  In India, year 1981 is used as a base period, at present.

 

Cost of Living Index Number or Consumer Price Index Number

 

An index number is designed for the purpose of finding how much the cost of living has changed over a period for middle class family is known as the

Cost of Living Index Number or Consumer Price Index Number.  It is usually calculated separately for the workers divided into two categories, viz. agricultural workers and industrial workers.

 

For example, the commodity groups taken into account for the industrial workers are –

 

1. Food items
2. Fuel and lighting
3. Clothing
4. House rent
5. Miscellaneous

 

The price quotations are asked for retail prices at various retail shops.  Based on the data obtained, generally one of the two techniques are (i) aggregate expenditure method and (ii) family budget method.

 

In aggregate expenditure method, we use the weighted aggregative price index number with base year quantities as the weights, i.e. the cost of living index number by the method of aggregative expenditure is –

 

∑p₁q₀

------- x 100

∑p₀q₀

 

In family budget method, the weighted average of price relatives is used where the base year expenditures are used as the weights –

 

∑wI

----

∑w

 

where  -

 

      p₁

I = --- x 100 and w = budgeted expenditure.

      p₀

 

If w=p₀q₀ only, then substituting for I and w in the formula, we get the index as -

 

∑p₁q₀

------- x 100

∑p₀q₀

 

Thus, by both the methods the cost of living index number is Laspeyre's price index number.  The difference between the methods lies in the collection of data.  If the data on base year's consumption are obtained, one uses the aggregative expenditure method and if the data on base year's expenditure are collected, one uses the family budget method.  The recent base year used in India is 1981.

 

Index numbers of Industrial Production

 

To measure the growth of industries, one requires a tool that can measure the change in quantity of output (in physical units) of various industries.  Generally, the industries are divided into the groups such as textile industries, mining industries, metallurgical industries and miscellaneous.  The data on output of these industries are collected regularly to keep track of the changes in the output.  Presently in India, the weighted average of quantity relative with the weights as the value added by the manufacturer over 1970 is used as the index number of industrial production.

 

Index of Industrial Production (IIP) is an abstract number, the magnitude of which represents the status of production in the industrial sector for a given period of time as compared to a reference period of time It is a statistical device which enables us to arrive at a single representative figure to measure the general level of industrial activity in the economy. Strictly speaking the IIP is a short term indicator measuring industrial growth till the actual result of detailed industrial surveys become available. This indicator is of paramount importance and is being used by various organisations including Ministries/Departments of Government of India, Industrial Associations, Research Institutes and Academicians.

 

The index is a simple weighted arithmetic mean of production relatives calculated by using Laspeyre's formula :

 

I=S (W_i R_i)/S W_i

 

Where I is the Index, Ri is the production relative of the ith item for the month in question and Wi is the weight allotted to it.

 

For the 1980-81 series, the Central Statistical Organisation used to receive monthly production data from as many as 18 source agencies, who collect data from the production units. For the revised series with base 1993-94 , the same set of 14 source agencies have been retained except for Railways, for which the consolidated data will now be supplied by the Railway Board instead of data being supplied earlier by 5 agencies. In terms of the number of items covered, the largest source is the Department of Industrial Policy & Promotion(DIP&P), which supplies data on as many as 213 out of 285 group of items in the manufacturing sector. The index relating to Mining and Quarrying sector is being supplied by the Indian Bureau of Mines, Nagpur which is dovetailed with manufacturing and electricity indices compiled by CSO to arrive at the General Index of Industrial Production. The data on Electricity sector is furnished by the Central Electricity Authority