The Purchasing Managers’ Index (PMI), a key sign of business activity in India’s manufacturing and services sectors, has exhibited a slowdown in the manufacturing sector’s expansion during November. New orders have seen a decrease in pace, and employment has further declined due to dwindling business optimism.
The Gravitational Shift in PMI Data
In an analysis of critical data points, India’s PMI fell to a three-month low of 56.3 in November compared to an over 12-year high of 58.9 in October. A score above 50 in PMI discourse is indicative of expansion, while a score below 50 suggests contraction. Although India’s PMI remains within the expansion zone, increasing Covid cases in specific states and uncertainties surrounding regional lockdowns are impacting confidence negatively.
The country witnessed slower increases across various areas, including factory orders, exports, buying levels, and output. Indian manufacturers are also holding back on hiring, as evidenced by a decline in employment in November due to observance of social distancing guidelines.
Understanding PMI Calculation
PMI is calculated based on survey responses about changes in respondents’ perception of crucial business variables from their previous month’s perspective. The primary objective of PMI is to furnish company decision-makers, analysts, and investors with insights into current and future business conditions. This calculation is conducted separately for the manufacturing and services sectors, following which a composite index is also constructed.
PMI ranges from 0 to 100, with a PMI above 50 denoting an expansion compared to the previous month. Conversely, a PMI under 50 signifies a contraction, and a reading of 50 indicates no change. If a month’s PMI is higher than the following month’s (as is the case here), it shows that the economy is contracting.
The PMI data is typically released at the beginning of each month, making it an effective leading indicator of economic activity.
The Role of IHS Markit and PMI’s Significance
More than 40 economies worldwide have their PMI data compiled by IHS Markit, a global leader in providing information, analytics and solutions for industries and markets that propel economies worldwide. This early release of PMI data aids in making informed decisions much sooner, given that the official statistics on industrial output, manufacturing, and GDP growth are released considerably later.
It’s crucial to note that PMI differs from the Index of Industrial Production (IIP), another gauge of economic activity level. This distinction is vital as both PMI and IIP serve different functions and provide different perspectives on the economic health of a nation.