Why in News: 
India’s factory output rose to 3.7% in June, down from 5.2% in May, due to weaker manufacturing growth.

What is IIP?  
As the name suggests, the Index of Industrial Production (IIP) maps the change in the volume of production in Indian industries. More formally, it chooses a basket of industrial products — ranging from the manufacturing sector to mining to energy, creates an index by giving different weight to each sector and then tracks the production every month. Finally, the index value is compared to the value it had in the same month last year to figure out the economy’s industrial health.
It is a composite indicator that measures the growth rate of industry groups classified under:
•          Broad sectors, namely, Mining, Manufacturing, and Electricity.
•          Use-based sectors, namely Basic Goods, Capital Goods, and Intermediate Goods.
 
How useful are monthly IIP figures to draw a conclusion about India’s growth? 
IIP figures are monthly data and as such it keeps going up and down. In fact, the release calls them “quick estimates” because they tend to get revised after a month or two. As such, it is true that one should not take just one month’s IIP data and project it for the whole year or indeed use it to conclude that the full year’s economic growth will be low.

About Eight Core Sectors:  
·         These comprise 40.27% of the weight of items included in the Index of Industrial Production (IIP).
·         The eight core sector industries in decreasing order of their weightage: Refinery Products> Electricity> Steel> Coal> Crude Oil> Natural Gas> Cement> Fertilizers.
 
Base Year for IIP is 2011-2012. 
Significance of IIP:
·         It is used by government agencies including the Ministry of Finance, the Reserve Bank of India, etc, for policy-making purposes.
·         IIP remains extremely relevant for the calculation of the quarterly and advance GDP (Gross Domestic Product) estimates
·         It is used to measure the physical volume of production.
·         This index is also used by business analysts, financial experts, and the private industry for different purposes.
·         It also tells about the Gross Value Added of the manufacturing sector quarterly.

Characteristics of Index of Industrial Production:
·         IIP is a composite indicator that gauges the pace of growth of many industry categories.  
·         Mining, manufacturing and electricity industries are all broad sectors.
·         Use based sectors, such as Basic Goods, Capital Goods, and Intermediate Goods.
·         It includes eight core industries of India representing 40% of the weight of items that are included in the IIP.
·         Eight Core Sectors/Industries included in IIP are electricity (19.85%), steel (17.92%), refinery products (28.04%), crude oil (8.98%), coal (10.33%), cement (5.37%), natural gas (6.88%), fertilizers (2.63%).
 
Basket of Products in Index of Industrial Production 
There are six sub-categories:
·         Primary Goods consists of mining, electricity, fuels and fertilizers.
·         Capital Goods that consist of machinery items, etc.
·         Intermediate Goods e.g. yarns, chemicals, semi-finished steel items, etc.
·         Infrastructure Goods such as paints, cement, cables, bricks and tiles, rail materials, etc.
·         Consumer Durables such as garments, telephones, passenger vehicles, etc
·         Consumer Non-durables such as food items, medicines, toiletries, etc.
  
Manufacturing Sector in India
India is the third most sought-after manufacturing destination in the world and has the potential to export goods worth US$ 1 trillion by 2030.
 
ADVANTAGE INDIA 
I. ROBUST DEMAND
Manufacturing exports have registered highest ever annual exports of US$ 447.46 billion with 6.03% growth during FY23 surpassing the previous year (FY22) record exports of US$ 422 billion.
By 2030, Indian middle class is expected to have the second-largest share in global consumption at 17%.
 
II. INCREASING INVESTMENT
Propelled by growth in priority sectors and driven by favourable megatrends, India’s manufacturing sector has opened itself into new geographies and segments.
Building on the competitive advantage of a skilled workforce and lower cost of labour, the manufacturing sector is also witnessing an increased inflow of capex and heightened M&A activity, leading to a surge in manufacturing output and resultant increased contribution to exports.
  
III. POLICY SUPPORT
The Production Linked Incentive (PLI) scheme has been notified for Large Scale Electronics Manufacturing in India. The scheme aims to attract large investments in the mobile phone manufacturing and specified electronic components, including Assembly, Testing, Marking and Packaging (ATMP) units.
Initiatives like Make in India, Digital India and Startup India have given the much-needed thrust to the Electronics System Design and Manufacturing (ESDM) sector in India.
  
IV. COMPETITIVE ADVANTAGE
The positive developments in the manufacturing sector, driven by production capacity expansion, government policy support, heightened M&A activity, and PE/VC-led investment, are creating a robust pipeline for the country’s sustained economic growth in the years to come.
 
Mains Practice Question:
 Q. Discuss the key drivers of growth of manufacturing sector in India.