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Purchasing Managers Index (PMI)

GS III >> Economy >> Growth

Context: India’s manufacturing sector demonstrated strong performance in November, rebounding from an eight-month low in October. The S&P Global India Manufacturing Purchasing Managers’ Index (PMI) increased to 56, indicating expansion.

Understanding of PMI:

• Definition: The Purchasing Managers’ Index (PMI) serves as a crucial indicator reflecting the prevailing economic trends in both manufacturing and service sectors.
• It operates as a diffusion index, providing insights into whether market conditions are expanding, contracting, or remaining stable, as perceived by purchasing managers.
• Purpose: The primary objective of the PMI is to furnish timely about current and future business conditions.
• Key Components: The PMI encompasses a monthly survey involving supply chain managers across 19 industries, covering both upstream and downstream activities.
• Interpretation: The PMI is a number from 0 to 100. A PMI above 50 indicates an expansion compared to the previous month.
• A PMI below 50 represents a contraction. A reading at 50 signifies no change. The greater the deviation from 50, the more significant the level of change.

India’s recent manufacturing sector performance:

• PMI increase: The PMI rose from October’s 55.5 to 56 in November, indicating expansion, as any value above 50 signifies growth.
• Price pressures eased: A notable feature of the results was a significant easing of price pressures. Although average purchasing costs increased, inflation rates reached the lowest point in the current 40-month sequence of increases.
• Output growth: The manufacturing industry showcased robust performance, with output regaining growth momentum. The growth of output gathered pace in November, driven by strengthening client demand and favourable input supply conditions.
• New business and recruitment: Firms’ ability to secure new business, both domestically and internationally, remained pivotal.
• Sustained growth in new orders brought positive implications for the labour market, with recruitment on an upward trajectory.

Significance of recent growth:

• Overall economic health: The expanded capacities, increasing workloads, and the necessity to replenish finished goods stocks collectively signal a robust state for India’s manufacturing economy as 2023 concludes. Expectations for a strong performance continue into 2024.
• Inflationary pressures: Inflationary pressures saw a retreat, marked by the weakest rise in purchase costs since August 2020. The majority of firms opted to maintain their fees unchanged since October, contributing to a stabilized economic environment.
• Supply and demand dynamics: Despite the rise in prices for raw materials and components in November, improved availability at suppliers and subdued global demand resulted in a significant retreat in cost pressures.

Advantages of PMI:

• Timeliness: The PMI is a monthly release, providing real-time insights into the economic activity of the manufacturing or services sector. This timeliness enables swift assessments by policymakers, analysts, and investors.
• Leading indicator: Recognized as a leading indicator, the PMI offers an early indication of economic trends, often preceding changes seen in other indicators like GDP growth or employment numbers.
• Comprehensive insight: By capturing information from various sub-components such as new orders, production, and inventories, the PMI offers a comprehensive view of economic activity.
• Comparative analysis: The PMI is constructed for easy comparison across different periods and countries. Its standardized scale facilitates interpretation, and the availability of PMI data for numerous countries globally allows for meaningful comparative analysis.

Disadvantages of PMI:

• Sample bias: The PMI relies on surveys from a limited sample of companies, potentially introducing sample bias. The surveyed companies may not fully represent the diversity of the entire sector or economy, leading to skewed insights.
• Lack of industry details: The index might not offer detailed information on which industries are the primary drivers of growth or contraction. This limitation hinders a more nuanced understanding of the specific sectors influencing the overall economic health.
• Subjectivity in survey responses: As the PMI relies on subjective survey responses from purchasing managers, individual perceptions, biases, and temporary fluctuations in business conditions can impact the accuracy of the data.
• Volatility and revisions: Monthly PMI readings can be volatile due to factors like seasonal variations, supply chain disruptions, or shifts in market sentiment.
• Additionally, initial readings may be subject to revisions based on more accurate information, potentially altering the original interpretation.

Way forward:

• Strategic policy adjustments: Policymakers should assess the PMI trends and consider making strategic adjustments in economic policies. Aligning policies with the insights from PMI data can help capitalize on areas of strength and address potential challenges.
• Investment promotion: A positive PMI reflects growth opportunities. India can use this momentum to attract investments by showcasing a vibrant and expanding manufacturing sector. Investment promotion campaigns can highlight the conducive business environment indicated by the PMI.
• Skill development initiatives: As the manufacturing sector expands, investing in skill development programs becomes crucial. Ensuring the workforce is equipped with the necessary skills can enhance productivity and contribute to the sustained growth indicated by the PMI.
• Global trade opportunities: Strengthening manufacturing capabilities can position India favourably in global trade. Leveraging the demand indicated by the PMI, India can explore and expand its export opportunities, contributing to economic growth.

Source: India’s manufacturing PMI rises in Nov