Home / Markets / Mark To Market /  Decadal high manufacturing PMI should be taken with doses of salt

Business activity in India’s manufacturing sector surged to its highest level in more than a decade. The seasonally adjusted headline purchasing managers’ index (PMI) rose from 56.8 in September to 58.9 in October. A reading above 50 indicates expansion and one below that threshold points to a contraction.

The gradual reopening of the economy and restocking ahead of the festive season has aided the recovery. The October reading was the highest since 2008, according to the survey published by IHS Markit. However, as is true for all high-frequency indicators in the recovery phase, this reading should be taken with a large dose of salt.

“We should not get excited about the headline PMI number. After a sharp contraction, businesses are bound to see an improvement as the economy opens up. Concerns on high unemployment and rising income inequality remain. With the International Monetary Fund (IMF) projecting a fall in India’s per capita income, the outlook on demand remains dull. The extent of durable damage that this pandemic has done to the Indian economy is still not known," said Indranil Pan, chief economist, IDFC First Bank.

Rising optimism
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Rising optimism

The sub-index tracking employment continued to decline for the seventh consecutive month. The index remained in the contraction zone at 47.3 in October. Compliance of government guidelines related to the pandemic caused a further reduction in employment, the report said.

The sharp recovery was aided by a revival in exports. New export orders rose from 53.8 in September to 55.2 in October. The pace of improvement in this sub-index was the most pronounced in close to six years, the report said. Consequently, the sentiment of manufacturers towards the year-ahead production outlook got a significant boost. The level of confidence was at a 50-month high of 64.3 in October. Manufacturers were convinced that the resurgence in sales will continue in the coming months as indicated by a strong upturn in input buying amid restocking efforts, said the survey report.

However, some experts see downside risks to this optimism, especially with regard to exports. “Export demand has risks from the outcome of the US elections, Brexit and the second wave of coronavirus infections in Europe. Also, we need to remember that exports have been driven by global fiscal stimulus and a stimulus may not last forever," Pan said.

“Improvement in the PMI comes on a low-base and is largely sentiment-driven. It is not surprising to see improvement in demand and production ahead of the festive season. A better sense would come after November. One should be careful about drawing long-term conclusions from it," said Suvodeep Rakshit, senior economist, Kotak Institutional Equities.

“Much of the recent improvement is because of easy gains as the economy has reopened. What’s more, we think that many firms will continue to struggle even when containment measures are fully lifted, given the lasting damage that has already been inflicted on corporate balance sheets in this crisis," Darren Aw, Asia economist at Capital Economics Ltd, said in a report on 2 November.

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