India’s manufacturing economy recorded an improvement in growth during September amid firmer gains in new orders, output, and employment. Sales rose from both domestic and foreign clients, whilst manufacturers raised their buying activity and bolstered stocks of purchases in anticipation of further growth. On the price front, input costs rose at a stronger rate amid reports of higher prices for fuel and steel. Charges were subsequently increased at a slightly firmer pace. Manufacturers remain confident that output will increase over the coming year.
The Nikkei India Manufacturing Purchasing Managers’ Index (PMI) strengthened slightly in September to reach a level of 52.2 (up from 51.7 in August). Solid growth of the manufacturing sector during the latest survey period extended the current run of expansion to 14 months. Underpinning the overall expansion was a firmer increase in levels of new work. Solid growth was linked to gains in both domestic and foreign demand. Indeed, export sales strengthened, with the net gain the best record since the start of the year. High product quality was noted as a factor supporting total new order book growth.
PMI or a Purchasing Managers’ Index (PMI) is an indicator of business activity — both in the manufacturing and services sectors. It is a survey-based measure that asks the respondents about changes in their perception of some key business variables from the month before. It is calculated separately for the manufacturing and services sectors and then a composite index is constructed.
The PMI is derived from a series of qualitative questions. Executives from a reasonably big sample, running into hundreds of firms, are asked whether key indicators such as output, new orders, business expectations, and employment were stronger than the month before and are asked to rate them.
How does one read the PMI?
A figure above 50 denotes an expansion in business activity. Anything below 50 denotes contraction. Higher the difference from this mid-point greater the expansion or contraction. The rate of expansion can also be judged by comparing the PMI with that of the previous month data. If the figure is higher than the previous month’s when the economy is expanding at a faster rate. If it is lower than the previous month then it is growing at a lower rate.
What are its implications for the economy?
The PMI is usually released at the start of the month, much before most of the official data on industrial output, manufacturing and GDP growth becomes available. It is, therefore, considered a good leading indicator of economic activity. Economists consider the manufacturing growth measured by the PMI as a good indicator of industrial output, for which official statistics are released later. Central banks of many countries also use the index to help make decisions on interest rates.
What does it mean for financial markets?
The PMI also gives an indication of corporate earnings and is closely watched by investors as well as the bond markets. A good reading enhances the attractiveness of an economy vis-a-vis another competing economy.