The recent news reveals that the IHS Markit India Manufacturing Purchasing Managers’ Index (PMI) has slid to 48.1 in June, down from 50.8 in May. This is a significant drop below the 50-level mark that distinguishes growth from contraction. The manufacturing activity in India experienced a contraction in June, marking the first time in 11 months due to the destructive impact of the second wave of Covid-19 pandemic and stringent containment measures.
Impact of the Pandemic on Manufacturing Activity
The reinstated contraction in the facets of factory orders, production, exports, and purchase quantities are all a consequence of the reduced demand due to the ongoing pandemic crisis.
Understanding the PMI
The PMI is a survey-based metric that records the changes in the key business variables as perceived by the respondents, in comparison with the preceding month. The main objective of PMI is to offer data about current and upcoming business conditions to company decision makers, analysts, and investors.
The PMI is calculated separately for the manufacturing and services sectors with an additional composite index constructed thereafter. The PMI number ranges between 0 and 100. A print over 50 indicates an expansion, while a score under 50 signals contraction. An exact reading at 50 suggests no change.
Significance of PMI
The PMI gauges the economic health of the manufacturing sector. If the PMI of the previous month exceeds that of the present month, it hints towards economic contraction. PMI is usually declared at the beginning of each month, thereby making it a reliable leading indicator of economic activity.
Role of IHS Markit in PMI Compilation
IHS Markit, a global leader in information, analytics, and solutions for industries and markets that steer the global economies, is the compiler of PMI for over 40 economies around the globe.
PMI helps in making well-informed decisions at an earlier stage as the official data on industrial output, manufacturing, and Gross Domestic Product (GDP) growth usually comes much later.
PMI vs. Index of Industrial Production (IIP)
While both PMI and IIP measure the level of activity in the economy, they are different. Unlike PMI, IIP encompasses a broader industrial sector. However, compared to a standard industrial production index, PMI is noted to be more dynamic.
The June contraction of India’s manufacturing activity, as reflected in the latest PMI data, is a stark reminder of the pandemic’s ongoing impact on the economy. As the country continues to grapple with the crisis, PMI will continue to serve as a crucial tool for understanding and predicting economic trends.
