India’s factory activity grew at its weakest pace in seven months in March as renewed lockdowns to curtail a resurgence in COVID-19 cases dampened domestic demand and output, a private survey showed, forcing firms to cut headcount again.
The Indian government recently advised States to try and control the rapid spread of the virus. Tighter restrictions on activity suggest factories could be in for a tough April.
Q. What is Purchasing Managers’ Index or PMI?
Purchasing Managers’ Index or PMI is an economic indicator, which is derived after monthly surveys of different companies. The index shows trends in both the manufacturing and services sector. The index helps in determining whether the market conditions, as seen by purchasing managers, is expanding, contracting or staying the same. It is used to provide information regarding the current and future business conditions.
PMI is one of the closely watched indicators of business activity and helps in predicting the economic health of a country. There are two types of PMI — Manufacturing PMI and Services PMI. A combined index is also made using both manufacturing PMI and services PMI.
Q. How is the manufacturing PMI derived?
The PMI is derived by sending fact-based questions to a large number of companies in the concerned sector. For manufacturing PMI, the questionnaire is sent to manufacturing companies. The questions are factual in nature and the survey is not meant for opinions, intentions, or expectations. The questions are related to 5 key variables. The variables with their weights in the index are — new orders (30%), output (25%), employment (20%), suppliers’ delivery times (15%) and stock of items purchased (10%). The surveys are conducted on a monthly basis.
A PMI number greater than 50 indicates expansion in business activity. A number less than 50 shows contraction. The rate of expansion is also judged by the difference from the mid-point (50) and also by previous month’s data.
PMI is a good indicator of the economic activity in any country. Usually PMI is released before other indexes such as GDP, industrial output. PMI gives an idea about the direction the economy is taking and helps economists in predicting the manufacturing activity in the country. The manufacturers and suppliers use the index to decide on their production needs based on new orders in the coming months. The index also helps investors who are looking to invest in the stock markets as it helps in determining the economic health of the country.
Q. What are the reasons for decline?
Expansion slows :
The Nikkei Manufacturing Purchasing Managers’ Index, compiled by IHS Markit, declined to a seven-month low of 55.4 last month from February’s 57.5, but remained above the 50-level separating growth from contraction for an eighth straight month.
Despite foreign orders growing at a faster pace in March, a sub-index tracking overall demand declined to its lowest since August 2020. Output also grew at its weakest pace in seven months.
Survey participants indicated that demand growth was constrained by the escalation of the COVID-19 pandemic, while the rise in input buying was curtailed by an intensification of cost pressures.
With COVID-19 restrictions expanded and lockdown measures re-introduced in many States, Indian manufacturers look set to experience a challenging month in April.
Rate of lay-offs intensify
Although Asia’s third-largest economy was predicted to grow at a faster pace this fiscal year than previously thought, according to a Reuters poll published last week, a significant majority of economists said a surge in coronavirus cases was the biggest risk to the outlook.
After a year-long spree of job cuts, factories intensified the rate of lay-offs to its strongest in six months in March.
Both input and output prices increased at a slower pace last month, signalling overall inflation that accelerated to a three-month high in February might ease and stay within the RBI’s inflation target of 2-6%.
That would help the central bank maintain its accommodative policy stance to support economic growth but optimism about the year ahead waned.
While predictions that the vaccination programme will curb the disease and underpin output growth in the year ahead meant that business confidence remained positive, growing uncertainty over the near-term outlook due to a rise in COVID-19 cases dragged sentiment to a seven-month low.