The latest India Manufacturing Purchasing Managers’ Index (PMI) by IHS Markit reveals that manufacturing sector activity in July 2020 underwent a more rapid contraction compared to June 2020. The Manufacturing PMI for July was reported at 46, a drop from June’s 47.2. In the context of the PMI, a score above 50 indicates growth while anything below is indicative of contraction. After 32 consecutive months within growth territory, the PMI fell into contraction territory in April. May and June showed signs of recovery, only to slide back in July.
Understanding Manufacturing PMI
Manufacturing PMI is a critical economic indicator. It stood at 46 in July 2020, indicating a sharp downturn from the previous month’s PMI of 47.2. With PMI readings, any value exceeding 50 signifies manufacturing sector growth, while a score less than this denotes contraction. This means that the Indian manufacturing sector has contracted for four straight months. In April, after 32 consecutive months of growth, the PMI dipped into contraction. There were glimpses of recovery in May and June, but it once again regressed in July 2020.
Reason for Contraction
One of the key causes of this contraction is the subdued demand conditions. As new epicenters of the Covid-19 pandemic emerge, certain businesses are still closed due to ongoing lockdown extensions. Consequently, export orders have seen a decrease, further impacting the manufacturing sector’s growth.
Impact of the Contraction
The accelerated decline in the manufacturing industry is undermining the trend of economic stabilization observed over the past two months. Companies have reacted to this by reducing their staff numbers and scaling back on purchasing activities, which has had broader economic implications.
Purchasing Managers’ Index (PMI) Explained
PMI is used to gauge the prevailing direction of economic trends in both the manufacturing and service sectors. It takes the form of a diffusion index, summarizing whether market conditions, as perceived by purchasing managers, are expanding, holding steady, or contracting. The PMI’s primary function is to offer company decision-makers, analysts, and investors insights into present and future business conditions. Although it shares similarities with the Index of Industrial Production (IIP) in providing a measure of economic activity, there are differences between them. The IIP encompasses a broader industrial sector compared to the PMI, but the latter is more dynamic than a standard industrial production index.
The Way Forward
In India, the adverse effects of the lockdown appear to outweigh the positive impact of the unlock phase. It’s crucial, therefore, that priority is given to curbing the spread of the Covid-19 pandemic to ensure economic recovery becomes sustainable.