Purchasing Managers Index: How is PMI affecting our economy?
COVID-19 has not only taken over the whole of humanity but also the world economy.
The world economy has been shaken at its worst.
Especially when we talk about India, it is facing a severe economic slowdown. Due to the lockdown, not only the government of India is hampered, but many sectors as well.
It has been seen that the manufacturing sector has been the worst hit. Within a few months, we have seen many ups and downs in the economy, with crude oil hitting at its lowest, to opening the liquor stores to regain the economic consumptions in India.
What is this all about?
All these factors are solely dependant on factors like demand and supply. In the case of crude oil, demand was low but supply was high, which impacted drastically. And in the case of liquor stores opening in India, demand was high and supply was limited, as only limited stores were opened and when the demand is high, the prices are meant to reach high.
The demolition has affected the Demand and supply chain across the country. This has led or to say has also impacted the manufacturing of Purchasing Managers Index (PMI) falling to 27.4 in April. Thus, India’s manufacturing activity contracted at its sharpest pace in more than 15 years in April.
Therefore, COVID-19 is to be blamed for.
The decline in the index is a sign that work has stopped in almost all sectors from manufacturing in the country.
Let us understand what this means for the economy.
What is PMI?
Well, PMI stands for the Purchasing Managers Index which works as an indicator to measure the financial health of the manufacturing sector. Through this, the economic condition of a country is estimated.
It is based on several activities in the private sector, including the service sector. In this, almost all countries involved in this are compared to the same criteria. The main purpose of PMI is to make the confirm information about economy available even before the official data, due to which the exact signals about the economy are already available.
But the question is that why does a country need PMI’s help?
Well, the PMI's help is usually taken to find the business and manufacturing environment, and it is primarily based on 5 key factors-
- New orders
- Inventory level
- Supply delivery
- Employment environment.
Now since we know its main aim, let us now understand that who issues the PMI data and how does it work?
Purchasing managers index was started in 1948 by the US-based Institute of Supply Management, which works only for the US. The Singapore Institute of Purchasing and Materials Management works for Singapore, while the IHS Markit Group releases PMI data for 30 countries in the world, including India.
Let me tell you that only Private Sector Companies are included in the survey by IHS Markit Group for releasing PMI data i.e. Public Sector Companies are not included in it.
PMI is the most viewed index for business activities worldwide. Generally, the company offers its PMI Data with the name of the Sponsor. Currently, Direction of Economy in India is estimated based on Nikkei PMI data. Earlier these figures were released in the name of HSBC PMI.
Now let us understand how does PMI work?
The Purchasing manager’s index is a mixed index that is used to assess the state of the manufacturing and service sector. It is prepared on the basis of an opinion of Managers on different business aspects, in which opinion related to thousands of Managers related to Products, New orders, Industry expectations and Employment are taken.
Also, along with this, Managers are asked to give Opinion and Rating to the new position in last month's Compare, on the basis of which it is released every month.50 is considered as Base in PMI Data. Also, it is also considered as a magic figure. PMI data above 50 was seen as an expansion of business activities. While PMIs below 50 is seen as a decline in business activities.
That is, the difference in PMI data above or below 50 will be considered as much increase and decrease in business activities.
How can we remove the PMI?
Data for PMI is taken for Manufacturing & Service Sector in India. The service PMI covers 6 industries, including Transport and Communication, Financial Intermediation, Business Services, Personal Services, Computing & IT and Hotels & Restaurants. Survey questions are sent to Managers of companies associated with this industry for PMI assessment.
Weightage is given to their answers according to company size. The answers to these questions indicate that the condition of the industry is normal, poor or good. Weightage is in Percentage. If the conditions are good, then 1% weightage is available. If there is no change, a weightage of 0% is given in case of .5 and fall. This assessment is done in such a way that a level of 50 is called a normal state.
That is, there is no change in the activities. Whereas higher ranking indicates growth. A position below 50 indicates a slowdown in business activities.
As far as the manufacturing sector is concerned, questions for the survey are sent to Purchasing managers of 500 manufacturing companies. However, the final index is a composite index which represents 5 Indicators.
Those which are of pre-determined weightage include New Order Index, Output Index, Employment Index, Suppliers' Delivery Times Index and Stock of Items Purchase Index. The final panel of Companies and Purchasing Managers is chosen from Purchasing Managers of Industries spread across the country.
In this, data of 50 does not show any changes, but above 50 data shows the status of improvement.
Well, it is stated that there may be a tepid recovery in May as the government has allowed some resumption of economic activity. Thus, this is the basic impact and the workings of PMI in a country.
Also, NR Bhanumurthy, a professor at the National Institute of Public Finance and Policy stated that “It is early to comment if we are on a recovery path. It can go either way depending on the spike in Covid-19 cases and how the government responds. It is waiting and watches for the next week,”
Maybe with few relaxations during the lockdown, all the areas which are impacted might get better with the upcoming months.
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