A study of Inflation effect on the Index of

Industrial production in India

Session 2019-21

Submitted by: Submitted to:

Group-6 Amrendra Pandey
Deepa Raghuvanshi Assistant Professor
Garima Singh (Economics)
Kanika chhatwal
Khushboo Goyal
Manvi Jain
Megha Sharma
 TABLE OF CONTENT

1. Abstract…………………………………………. 2

2. Introduction…………………………………….. 2-3

3. Review of Literature…………………………… 4

4. Objective………………………………………… 4

5. Hypothesis………………………………………. 5

6. Research Methodology………………………..... 5

7. Data Analysis………………………………….... 6-7

8. Bibliography……………………………………. 8

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 A study of Inflation effect on the Index of
Industrial production in India

ABSTRACT
Index of Industrial Production has observed lots of ups and downs which could be visible in the
data collected for this study. This study has focused how inflation rates in India effected the
Index of Industrial production on monthly basis. This study considered monthly data of both the
variables starting from 1st April 2012 to 31st December 2016. Regression has been applied on the
collected data and the result of analysis shows that Inflation rate had influenced IIP in India. This
analysis is useful for industrialists, foreign investors and Government of India.

INTRODUCTION
In India Ministry of Statistics and Programme Implementation (MOSPI) is responsible for
compilation and release of the Index of Industrial Production. This is a monthly index which is
intended to measure changes over the time in the volume of industrial production in India. The
base year of the current series of IIP in India is 2011-2012. The current series of IIP with base
2011-2012 is based on 839 items clubbed into 407 groups of items. The distribution of these
items and weight among three sectors is shown in the Table1.1.

Table1.1
Sector No. of item (Item group) Weights
Mining 29(1) 14.373
Manufacturing 809(405) 77.633
Electricity 1(1) 7.994
Total 839(407) 100
Source: - Compiled by Researcher, Ministry of Statistics and Programme Implementation

The United Nations Statistics Division (UNSD) recommend inclusion of Mining and Quarrying;
Manufacturing; Electricity; Gas steam and Air-conditioning supply; as well as Water supply;
Sewerage; Waste management and Remediation activities in IIP. But due to non-availability of
data on monthly basis, has confined the scope of IIP in India to just Mining, Manufacturing and
Electricity sector only.

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Besides, the main classification of the index i.e. Mining, Manufacturing and Electricity sectors,
the IIP is also prepared based on the Use Based classification. Table1.2 shows different sectors,
Number of group in each sector and their respective weights as per the Use Based classification:

Table1.2
Sector Number of group Weights
Primary Goods 15 34.05
Capital Goods 67 8.22
Intermediate Goods 110 17.22
Infrastructure/ Construction 29 12.34
goods
Consumer durables 86 12.84
Consumer nondurables 100 15.33
Total 407 100
Source: Compiled by Researcher, Ministry of Statistics and Programme Implementation

Like IIP, Ministry of Statistics and Programme Implementation is responsible for compilation
and release of Inflation Rates in India however, it is been controlled by RBI. In India Inflation
rates are based on Consumer Price Index (CPI) which is calculated on monthly basis. Inflation
rates in India have a major impact on the demand and supply of goods and services thereby
affecting the Index of Industrial Production. In this report we try to analyze the impact of
inflation rates on Industrial Production in India.

Figure1.1

Trend Chart
140.0
120.0
100.0
80.0
60.0
40.0
20.0
0.0

IIP Inflation Rate

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REVIEW OF LITERATURE
Jandla Saritha, Vatsavai Swathi, Ajit Alka Singh, Sai Kumar. A (2015):

This research paper was made in the context of the global financial recession and its impact. The
study focuses on „How the Indian Index of Industrial Production got affected by Inflation?‟
Researchers collected 10 years data from 2006 to 2015 and used T test, Correlation, Regression,
Granger causality test and Johansen co integration test. This study showed that Inflation has a
positive correlation with IIP but has a negative correlation with other variables such as Monetary
Policy Rate and Gross Domestic Product.

M. Taslimi, M. Goudarzi and R. Rostamian (2012):

This research paper shows the effect of Inflation of industrial production and how does it affects
the Agricultural price Index. Time series data from 1974-2007 were used for the study. It has
used the Generalized Autoregressive Conditional Heterokedasiticy (GARCH) models to
estimate the uncertainty. The results of the Vector Auto Regression Test in this research paper
shows that inflation uncertainty has a positive relationship with the industrial price index
products.

Rakesh Kumar (2013):

This paper studies the impact of inflation variability on other macro-economic factors. This
study is based on the data from 1992 to 2012, the period which faced high and moderate
inflation. It has used Granger Causality and F test to analyse the relationship of Inflation with
IIP and CPI. This study shows the discouraging effect of IIP on Inflation and vice versa.

OBJECTIVE
This study has been done with the following objectives

1) To analyze the impact of Inflation Rates on Index of Industrial Production by taking the
monthly data of both the variables from 1-4-2012 to 31-12-2016 with the help of
regression analysis.

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HYPOTHESIS
H0- Null Hypothesis: Inflation does not affect IIP
H1- Alternative Hypothesis: Inflation affects IIP

Scope
This study has emphasized on two macroeconomic variables namely Inflation rate and Index of
Industrial Production to find out the impact of former on the latter. This analysis has focused on
monthly data of both the variables starting from 1st April 2012 to 31st December 2016.

RESEARCH METHODOLOGY
T test has been done in the study which is used to compare two different set of values. T test is
usually performed on small set of data and generally applied to normal distribution which has a
small set of values. The test compares the mean values and standard deviation of two samples
chosen for the analysis. The formula for T- test is given below:-

Regression it is the closest thing for estimating causality in data analysis, and that is because
it predicts how much the numbers “fit” a projected straight line. There are advanced regression
techniques as well for curvilinear estimation. However, the most common and widely used form
of regression is linear regression and least squares method to find an equation that best fit a line
representing what is called the regression of Y on X.

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 DATA ANAYSIS
Regression
Model Summary

Regression Statistics
Multiple R 0.693176726
R Square 0.480493973
Adjusted R Square 0.471048409
Standard Error 4.893944497
Observations 57

ANOVA

Significance
df SS MS F F
Regression 1 1218.366987 1218.36699 50.86980155 2.28976E-09
Residual 55 1317.288101 23.9506927
Total 56 2535.655088

Coefficients

Coefficients Standard t Stat p-value Lower 95% Upper Lower 95% Upper
Error 95% 95%
Intercept 124.7545 1.91023 65.30845 8.24331E- 120.92636 128.5827 120.92636 128.5827
X 54
Variable 1.75215 .245664 -7.13230 2.28976E- 2.244729 1.25982 2.244729 1.25982
1 09

Interpretations
From the available statistics regression equation for the two variables will be

IIP = 124.7545 + 1.75215 Inflation rate

Where,

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Dependent Variable – IIP
Y intercept- 124.7545
Slope Coefficient – 1.75215
Independent Variable – Inflation Rate
Regression weight estimate has been applied to measure the impact of Inflation Rate on the
economic indicator i.e. Industrial Production and from the Model Summary R value is 0.48
which is near to 50% which shows the significance of the probability value i.e. shows that
industrial production is significantly related to inflation rate. Also, the p-value is 2.28976E-09
which is very smaller when compared with alpha value i.e.0.05. This help us reject the Null
Hypothesis (H0- Inflation Rate does not affect IIP) However, looking at the Table of
Coefficient, t- Stats of Variable1 is negative i.e. -7.13230 which shows the inverse or negative
relationship between the two variables taken for the purpose of analysis i.e. when the Inflation
Rates in India (2012-2016) increased economy had experienced a slowdown in the Industrial
Production and vice-versa.

During the selected period the Indian economy was facing a structural growth slowdown
resulting into persistent slowdown in the industrial growth. This slowdown was attributable to
declining household saving rates, low agricultural growth. Low agricultural growth was causing
low agricultural as well non-agricultural wage growth in rural and urban areas, which was
impacting the demand of both areas adversely. This persistent slowdown in the industrial growth
was forcing the RBI to cut the policy rate, however, due to already rising headline inflation
above the medium term targets of RBI (4%) forced the RBI to think again before taking any
policy rate cut decisions.

Figure1.2

Source: - The Economic Times

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BIBLOGRAPHY
1. www.tradingeconomics.com
2. www.rbi.org.in
3. www.mospi.org.in
4. www.indiaresearchjournal.com