Why India’s industrial production is important

In India, production changes are measured by the Index of Industrial Production (or IIP). It’s released on a monthly basis. This is an important indicator for assessing the health of the industrials sector—especially in India.

As explained in the last part in this series, the industrials sector saw muted growth. The sector hasn’t increased its share in India’s gross domestic product (or GDP) for over a decade. With the new “Make in India” program, there’s a renewed focus on the sector’s revival. This makes tracking the sector’s growth even more important.

The IIP is computed by accounting for the number of items produced in the current month versus the average monthly production in the base year. The current base year used for this calculation is 2004–2005, or fiscal year 2005. The base year for calculating the IIP is revised at set periods, so that the index captures changes in the composition and structure of the industry over time. The changes in composition and structure are due to technological changes, reforms, and peoples’ consumption habits.

Before 2004–2005, the base year that was used to calculate IIP was 1993–1994. In India, IIP is released with a one-month lag. For example, the index released in November will be the index for September.

Currently, the index takes into account 682 items under three sectors:

1. Mining – 61 items
2. Manufacturing – 620 items
3. Electricity – one item

The sectors have weights of 14.16%, 75.53%, and 10.32%, respectively. The item basket is selected while keeping in mind that the contribution of the items to national product should be about 80%. However, it’s important that production data for the basket components is regularly available from data source agencies. If the data isn’t available, then an item isn’t selected for the basket—even though it may have a higher contribution to national product compared to other selected products.

When the base year changed from 1993–1994 to 2004–2005, the following items were added to the index for the first time—apparel, gems and jewelry, newspapers, skimmed or pasteurized milk, steel structures, copper and copper products, writing and printing paper, cattle and poultry feed, instant food mixes, fruit pulp, and molasses.

An exchange-traded fund (or ETF) that has significant exposure to India’s industrials is the EGShares India Infrastructure ETF (INXX). For broader exposure to India, you can invest in the WisdomTree India Earnings Fund (EPI) and the iShares MSCI India ETF (INDA).

If you want broader exposure to emerging markets where India forms more than 10% of the portfolio, you can consider the Vanguard FTSE Emerging Markets ETF (VWO) and the Schwab Emerging Markets Equity ETF (SCHE).

In the next part of this series, we’ll discuss India’s IIP.