What is Base Effect?

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Overview:

As per revised estimates, India’s industrial output measured in terms of Index of Industrial Production (IIP) bounced back to rise 7.1% in November 2022, after plummeting 4.2% in October 2022 and this rise was aided by base effects.

Why in news?

  • The rise was aided by base effects as November 2021 had clocked just 1% growth, but also marked a 6% uptick in output levels over October 22, which incidentally recorded the lowest level for the Index of Industrial Production (IIP) since November 2021.

 

What is a Base Effect?

  • The base effect is the impact that selecting a different reference point for a comparison between two data points can have on the comparison's outcome.
  • For Eg: In the context of inflation, the base effect is a distortion in a current inflation figure caused by exceptionally high or low levels of inflation in the previous reference period.
  • If the inflation rate was low in the corresponding period of the last year, then even a small increase in the price index will give a high rate of inflation in the current year.
  • When comparing two data points, choosing a reference point will be crucial as the base effect can highly distort or mislead the interpretation of numbers.
  • The base effect could also result in major differences in percentage comparisons. If we chose a reference point that is too low, there could be an overestimation and if the base is too high, it could result in gross underestimation of the situation.

 

Index of Industrial Production (IIP)?

  • The Index of Industrial Production (IIP) is an index which shows the growth rates in different industry groups of the economy in a stipulated period of time.
  • Who publishes IIP? The IIP index is computed and published by the Central Statistical Organisation (CSO) under the Ministry of Statistics and Programme Implementation on a monthly basis.
  • Currently IIP figures are calculated considering 2004-05 as base year.

 


Q1) What is the Price Index?

 A price index is a measure of the average change in the price of a basket of goods and services over time. It is used to track inflation.

Source: Industrial output bounced back to rise 7.1% in November