The Manufacturing PMI without rose-tinted glasses
The Nikkei India Manufacturing Purchasing Managers’ Index (PMI) for November came in at 52.6, the highest reading since October 2016, but that is hardly reason for celebration. The PMI is a month-on-month measure of momentum in private sector activity, and the October manufacturing PMI, at 50.3, was just barely in expansionary territory. A reading above 50 denotes expansion, while one below it shows contraction. Simply put, the weak reading for October is one reason for the higher index in November.
To place the November reading in perspective, consider the manufacturing PMI of 52.3 in November 2016 (chart 1). That was, as we all know, the month when the demonetization bomb burst upon the economy. Yet the level of the PMI was only a bit lower than what it is in November 2017. And, not to forget, the November 2016 index of 52.3 came after a reading of 54.5 in October 2016. Taken together, the PMI numbers show that the expansion in the manufacturing sector in October-November 2016 was stronger than the one in October-November 2017.
A third reason for caution is that, as the chart shows, the manufacturing PMI for March and April 2017 were at 52.5, just a smidgeon below the November 2017 level. So the manufacturing sector has flattered to deceive earlier. We should wait a while before clinking our glasses to the manufacturing recovery.
Nonetheless, it stands to reason that sooner or later the manufacturing sector will perk up from the damage caused by the ham-handed implementation of GST.
There is, though, another factor to be considered. As chart 2 shows, the Input Price index of the India Manufacturing PMI has consistently been higher than the Ouput Price index for the past two years. Indeed, the Output Price index has, for most months, barely kept its head above the 50 mark separating a price increase from a price decline. The Input Price index, on the other hand, has displayed no such restraint, thanks to the hardening of commodity and fuel prices. The momentum in input prices has once again been building up since August 2017, as the chart shows. This indicates pricing power continues to elude manufacturers and margins are still being squeezed.
The PMI press release says, “Anecdotal evidence indicated firms were unable to fully pass on higher cost burdens to customers amid intensive competitive conditions.”
As long as there’s substantial spare capacity in the manufacturing sector, margins will remain under pinched. The anti-profiteering police will doubtless add to the pressure.