Prelims Level
Mains Level
Prelims Syllabus : Economy Mains Syllabus : Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

In News:

  • The country’s manufacturing sector activity edged higher in January as companies continued to scale up production and employment, driven by the fastest rise in factory orders since December 2017, according to a monthly survey.

Explained:

  • The Nikkei India Manufacturing Purchasing Managers’ Index (PMI) increased from 53.2 in December to 53.9 in January, indicating stronger improvement in the health of the goods producing sector.
  • This is the 18th consecutive month that the manufacturing PMI remained above the 50-point mark. According to the survey, the increase in factory orders was the strongest seen in 13 months. Besides, favourable economic conditions, strengthening demand and sales growth also picked up in January.

What is Purchasing Managers’ Index (PMI)?

  • For India, the PMI Data is published by Japanese firm Nikkei but compiled and constructed by Markit Economics (for the US, it is the ISM). The variables used to construct India’s PMI for manufacturing sector are: Output, New Orders, Employment, Input Costs, Output Prices, Backlogs of Work, Export Orders, Quantity of Purchases, Suppliers‟ Delivery Times, Stocks of Purchases and Stocks of Finished Goods.
  • Similar variables are used for the construction of services PMI. A manufacturing PMI and a services PMI are prepared and published by the two.

What it means to Economy?

  • In terms of composition, we can say the PMI is a sentiment tracking index. As indicated earlier, an indicator of the economic health of the manufacturing sector, the Purchasing Managers’ Index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment
  • A reading over 50 on this survey-based index indicates expansion, anything below it reflects contraction.

How PMI is different from IIP?

  • The popular index that measures growth in the industrial sector as far as India is concerned is the CSO prepared Index of Industrial Production. IIP shows the change in production volume in major industrial subsectors like manufacturing, mining and electricity. Similarly, the IIP also gives use based (capital goods, consumer goods etc) trends in industrial production. It covers broader industrial sector compared to PMI.
  • But compared volume-based production indicator like the IIP, the PMI senses dynamic trends because of the variable it uses for the construction of the index.
  • For example, new orders under PMI show growth oriented positive trends and not just volume of past production that can be traced in an ordinary Index of Industrial Production. Inventory level shows recessionary or boom trends. Employment scenario is also sentimental indicator. Hence, the PMI is more dynamic compared to a standard industrial production index

Some other key Benefits than other Indicators:

  • Timeliness- Monthly publication with PMI data released in advance of comparable official economic data (IIP, GDP estimate, etc.)
  • Comparability- Standardised data collection across economies, allowing for direct comparisons
  • Factual-Based on responses to questions on actual business conditions, rather than opinion or confidence-based measurements
  • Extensive coverageMore than 20,000 companies surveyed monthly across over 30 major developed and emerging economies
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