Why in the News?
- Recently, India’s Manufacturing Purchasing Managers’ Index (PMI) fell to a two-year low, reflecting a slowdown in the pace of expansion in manufacturing activity.
- The decline was driven by easing growth in new orders, production, employment, and export demand, indicating moderation in manufacturing momentum despite remaining in the expansion zone.
What is Manufacturing PMI?
- The Purchasing Managers’ Index (PMI) is a survey-based indicator of business activity in an economy.
- It captures changes in business conditions in both the manufacturing and services sectors by recording how purchasing managers perceive key variables compared to the previous month.
- Because it reflects real-time business sentiment, PMI is regarded as a leading indicator of economic health of the country.
- The index helps determine whether business activity is expanding, contracting, or remaining stable.
Types of PMI
- PMI exists in two forms — Manufacturing PMI and Services PMI, and a combined PMI (composite) index is also calculated using both to provide an overall view of economic activity.
How is Manufacturing PMI Derived?
- Manufacturing PMI is compiled through monthly surveys sent to a large sample of manufacturing companies.
- The questionnaire consists of objective, fact-based questions, not opinions or expectations.
- It evaluates five key variables, each assigned a specific weight:
- New Orders (30%) – Indicates demand conditions.
- Output (25%) – Reflects production levels.
- Employment (20%) – Shows hiring or workforce trends.
- Suppliers’ Delivery Times (15%) – Signals supply-chain efficiency.
- Stock of Items Purchased (10%) – Indicates inventory movements.
PMI Scale and Interpretation
- PMI is expressed on a scale of 0 to 100.
- A PMI above 50 signifies expansion in manufacturing activity.
- A PMI below 50 indicates contraction.
- A reading of exactly 50 denotes no change from the previous month.
- The pace of growth or decline is assessed by the distance from the 50 mark and by comparison with earlier PMI readings.
- If the current PMI is lower than the previous month’s PMI, it suggests a slowdown or weakening of economic momentum.
Who Publishes PMI?
- PMI is generally released at the beginning of each month, making it a leading indicator of economic activity, ahead of data such as GDP and industrial output.
- The PMI was first introduced in 1948 by the Institute for Supply Management (ISM) in the United States.
- PMI for different countries is compiled by various institutions:
- IHS Markit (now part of S&P Global) compiles PMI data for over 40 economies, including India.
- In India, the Manufacturing PMI is based on a survey of around 500 manufacturing firms.
Significance of Manufacturing PMI
- Manufacturing PMI is a key barometer of economic health, as the manufacturing sector plays a crucial role in employment, output, and exports.
- A higher PMI reading indicates strong industrial performance and positive growth prospects.
- A lower PMI reading signals stress in manufacturing activity and may point to broader economic weakness.
- The index helps:
- Economists forecast economic trends.
- Manufacturers and suppliers plan production and inventory.
- Investors assess market conditions and investment risks.
India’s Manufacturing Purchasing Managers’ Index (PMI) is closely watched as an economic indicator. Consider the following statements:
1. PMI provides a leading indicator of economic activity because it is released ahead of GDP and industrial output data.
2. The composite PMI is calculated by combining the Manufacturing PMI and Services PMI.
3. PMI readings at exactly 50 indicate moderate expansion in business activity.
4. PMI surveys are based on fact-based questions rather than opinions or expectations.
Which of the statements given above is/are correct?
(a) 1, 2 and 4 only
(b) 1 and 3 only
(c) 2 and 4 only
(d) All of the above
Answer: (a) 1, 2 and 4 only
Explanation:
Statement 1: Correct – PMI is released at the beginning of the month and reflects real-time business sentiment, making it a leading indicator ahead of GDP or industrial output.
Statement 2: Correct – A composite PMI is derived by combining the Manufacturing PMI and Services PMI to provide an overall view of economic activity.
Statement 3: Incorrect – A PMI reading of 50 indicates no change, not moderate expansion. Readings above 50 indicate expansion and below 50 indicate contraction.
Statement 4: Correct – PMI surveys are fact-based and not opinion-based; they measure changes in key variables like output, new orders, and employment.
