Purchasing Managers’ Index: Optimism in the air

Among various economic indicators tracked keenly by corporates and policy makers is the Purchasing Managers' Index (PMI).

Surveying purchasing executives in over 500 manufacturing companies in India, this number captures the trends in parameters such as new order flows, stocks of items purchased, backlogs of work, employment levels and suppliers' delivery times.

Hence, unlike the Index of Industrial Production (IIP) which reflects the on-the-ground production levels, the PMI is designed to indicate industrial activity in advance. With 50 points being the line that differentiates expansion (>50) from contraction (<50), a reading of 57.5 points clocked by the manufacturing PMI for January, has brought cheer to the Indian economy.

Does January's healthy reading indicate that India could be back on the high growth path shortly?

IIP trails PMI

Consider this. The PMI opened the financial year touching a high of 58 points in April last year. But each successive month since then saw increasing pessimism from the companies, indicating that a slowdown was on the cards.

By September last year, the manufacturing PMI touched 50.4 points. This did play out as a ‘lead' indicator for the IIP. The peaking of the PMI in April showed up in the IIP in June where it recorded a high 8.8 per cent growth.

Following the September low of the PMI, the IIP too touched a low of –5.1 per cent growth in October last year.That said, the manufacturing PMI has steadily rebounded since October. With the PMI showing the way, the IIP can be expected to follow suit, its volatility notwithstanding. Already IIP for November grew at a surprise 5.9 per cent, beating expectations.

Survey points to optimism

Sub-segments of the PMI too point towards growing optimism. New business orders in December and January have grown at the fastest rates since June last year.

To meet higher new order obligations, stock of finished goods have increased for the third consecutive month in January. Ditto with stock of purchases (that is, raw materials/inputs).

Backlogs of work have also increased since October, coinciding with the rebounding of the PMI to the over-50 point mark. This is in contrast to the situation when after a gradually slowing expansion before that, backlogs of work actually contracted (i.e. went below the 50-points mark) in August and September. Besides, the last two months have seen employment in the manufacturing sector increase, putting an end to the period of job losses.

The PMI for the services sector too has displayed a similar trend. After bottoming out at 49.1 points in October, touched a six-month high of 58 points in January.

RBI action

With the PMI hinting at a revival in growth, interest rate cuts by the RBI may be just what the doctor ordered to put the economy back on track. However, the apex bank may not be in a hurry. More so, because upside risks to inflation still remain high.

Although inflation is expected to come down to 7 per cent by March, global crude prices, lag effect of rupee depreciation and slippages in fiscal deficit may spoil the party.

Already, the RBI has made its stance clear in the January 24 policy announcement – that while it would respond to increased downside risks to growth, it would at the same time strive to maintain an interest rate environment to contain inflation and anchor inflationary expectations.

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