At 55.3, manufacturing PMI hits eight-year high in January

The Purchasing Managers' Index (PMI) for manufacturing increased to 55.3 in January 2020 reaching the highest in nearly eight years.

The manufacturing PMI is calculated by IHS Markit from the responses to questionnaires sent to purchasing managers in a panel of around 400 manufacturers. The panel is classified by detailed sector and company workforce size, based on contributions to GDP.The responses from these managers are collected in the second half of each month. This reveal the direction of change compared to the previous month. Policy makers use this index as it reflects changes in manufacturing sector.

According to Ms Pollyanna de Lima, Principal Economist at IHS Markit, in India manufacturing sector growth continued to strengthen in January, with operating conditions getting better at a pace not seen in close to eight years.

The PMI results show that a significant rebound in demand improved growth of sales, input buying, production and employment as firms focused on rebuilding their inventories and expanding their capacities in anticipation of further increases in new business.

The subdued cost pressure also helped companies, thus, enabling them to restrict the rise in their fees to some extent. Ms Pollyanna de Lima added, "To complete the good news, there was also an uptick in business confidence as survey participants expect buoyant demand, new client wins, advertising and product diversification to boost output in the year ahead." 

This positive news is important at the time when there is lot of debate in emergence of green shoots after prolonged slowdown. Another indication of improvement was when the GST collection in January crossed Rs 1.10 lakh crore (US$ 15.74 billion), which is second highest collection after introduction of new indirect tax regime in July 2017. This improvement in the manufacturing sector is also expected to have better impact on the job creation, which is much required at this moment.

Though, the chances for any rate revision in the month of February is completely ruled out with this improvement in manufacturing. The retail inflation, key for revision of policy rate, has crossed 7 per cent standing beyond the RBI's comfort level.

The report also added that there will be an increase in the growth of new business, output, exports, input buying and employment.

At the same time, business sentiment strengthened and there were softer rises in both input costs and output charges.  Accordingly, PMI jumped to 55.3 In January from 52.7 in December.

The consumer goods sub-sector remained the brightest spot, though, the growth was sustained in intermediate goods and capital goods moved back into expansion. Companies noted the strongest upturn in new business intakes for over five years, which they attributed to better underlying demand and greater client requirements. Many firms also suggested that marketing efforts resulted in good outcome.

The increase in total sales was supported by strengthening demand from external markets, as noted by the fastest increase in new export orders since November 2018. Manufacturers witnessed a higher sale to clients in Asia, Europe and North America, with favourable exchange rates helping the upturn.

The Indian goods producers increased the production in January to meet the increased demand. However, the rise was the strongest in over seven and a half years, with the rate of expansion much higher than its long-run average.

Such was the strength of the rise in sales that some firms had to use their stocks to fulfil order obligations. As a result, inventories of finished products declined sharply in January.

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