There are two
key parameters that the government and private sector analysts use to gauge the
level of activity in the manufacturing sector — the Index of Industrial
Production (IIP) and the Manufacturing Purchasing Managers’ Index (PMI). While
a lot has been written about the IIP, less has been said about the PMI.
What
is manufacturing PMI?
There are two
main points of difference between the PMI and the IIP. The first is that the
PMI is a private sector survey while the IIP is gauged by the government. The
second difference is in what is being measured. While the IIP is a measure of
output, PMI, as the name suggests, measures activity at the purchasing or input
stage.
Together the two
indices provide a composite and reasonably comprehensive information about the
formal manufacturing sector. As with the IIP, the PMI suffers from the lacuna
of not measuring informal sector activity.
Another factor
to be kept in mind is that both the PMI and the IIP are based on surveys and
hence, represent only a sample of the entire formal manufacturing sector. In
addition, as with all surveys, the two are also susceptible to sampling errors,
errors in assigning weights to various indicators and errors that creep in due
to inaccurate responses.
How
is the PMI survey conducted?
The Nikkei India
Manufacturing PMI is based on data compiled from monthly survey responses by
purchasing managers in more than 400 manufacturing companies. The manufacturing
sector is divided into eight broad categories — basic metals, chemicals and
plastics, electrical and optical, food and drink, mechanical engineering,
textiles and clothing, timber and paper and transport.
The survey
responses are meant to reflect month-to-month changes based on the data
collected mid-month. For each of the indicators, the report shows the
percentage reporting each response, the difference between the number of higher
or better responses and lower or worse responses and something called a
‘diffusion' index. “Diffusion indexes have the properties of leading indicators
and are convenient summary measures showing the prevailing direction of
change,” Nikkei said in its report.
The Nikkei India
Manufacturing PMI is composite index based on five individual indices with
their own weightages — new orders (weightage 0.3), output (0.25), employment
(0.2), suppliers’ delivery times (0.15), stock of items purchased (0.1) and the
delivery times index inverted so that it moves in a comparable direction. Once
the overall number for the month is computed, the score is arrived at. A score above
50 denotes expansion while one below 50 signifies contraction.
What
has the PMI been saying for India?
The
Manufacturing PMI for India has been gradually declining from December when it
was 54.7, the highest it has been in more than a year. Since then, it has
declined to 52.4 in January and to 52.1 in February.
Growth in the
manufacturing component of the IIP accelerated in January compared with the
level in the previous month. Overall, the last three months have witnessed
manufacturing growing at a rate faster than what has been recorded inin about
two years.
One important
advantage the PMI has over the IIP is how quickly the data for any reporting
period comes out.
The
manufacturing PMI report for any given month comes out either on the last day
of that month or on the first day of the next month.
So, for example,
the next data release will be for March 2018 and will come out either on March
31 or April 1.
The IIP,
however, comes out after considerable delay. The data for a given month comes
out almost one and a half months later. The next release will be for February
2018 and will come out on April 12.
http://www.thehindu.com/todays-paper/tp-business/a-measure-of-manufacturing/article23288781.ece
