One of the important macro parameters that are often tracked by analysts is the index of industrial production (IIP) number and the core sector number. What is the importance of the IIP when it comes to taking a view on stocks and markets? Did you know that the IIP core sector weightage is a very important relationship? Also the IIP vs core sector relationship lies at the core of macro analysis for equity markets. But let us first understand what this relationship between IIP and core sector is all about?

IIP and the core sector relationship
Let us look at the core sector first. The core sector comprises the 8 key sectors that are at the core of the Indian economy. These 8 sectors include Coal, Crude Oil, Natural Gas, Refinery Products, Fertilizers, Steel, Cement and Electricity. These 8 sectors jointly constitute the core of the Indian manufacturing sector and constitute over 40% of the IIP. The index of industrial production represents a large chunk of the non-mining classification of the IIP.

Let us now move over to the Core sector numbers

How to interpret cues from IIP and core sector numbers?

A sharper and sustained growth in the IIP number is positive for the GDP since manufacturing accounts for more than 67% of the overall GDP growth. Normally, it has been seen that positive growth in GDP is synchronized with positive growth in the IIP numbers.

Core sector is useful as a turnaround indictor. Normally, economic activity picks up when the core sector number picks up. Normally, sectors like cement, steel and electricity are strong lead indicators for a revival in economic growth. These sectors have a strong multiplier effect on growth and that is normally positive for a revival in growth.

Higher production is normally associated with higher demand and this is a signal of a revival in economic activity and higher demand. This is normally conducive to higher growth in demand and a virtuous cycle leading to higher output and economic activity.