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

Factories’ output recorded a grand opening in January, as Purchasing Managers’ Index (PMI) for manufacturing surged to 55.3 in the month, the highest in nearly eight years.

Manufacturing PMI is compiled by IHS Markit from responses to questionnaires sent to purchasing managers in a panel of around 400 manufacturers. The panel is stratified by detailed sector and company workforce size, based on contributions to GDP.  The responses are collected in the second half of each month, and indicate the direction of change compared to the previous month. This index reflects changes in manufacturing sector and is used by policy makers.

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

Rebound in demand

The PMI results show that a notable rebound in demand boosted 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.

Companies also benefited from subdued cost pressures, which enabled them to restrict increases in their fees to some extent. "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," she said.

This good news is critical at the time when there is lot of debate in emergence of green-shoots after prolonged slowdown. One indication about improvement in manufacturing was visible when GST collection in January crossed Rs 1.10 lakh crore, which is second highest collection after introduction of new indirect tax regime in July 2017. Now, expectation is that improvement in manufacturing will Have better impact on job creation, which is much required at this moment.

However, with the improvement in manufacturing, chances for any rate revision in the month of February is completely ruled out. It should be noted that retail inflation, key for revision of policy rate, has crossed 7 per cent which is beyond the RBI's comfort level.

Improved business sentiment

According to report also noted an increase in the growth of new business, output, exports, input buying and employment gather speed.

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, although 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. A number of firms also suggested that marketing efforts bore fruit.

The rise 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 particularly noted higher sales to clients in Asia, Europe and North America, with favourable exchange rates assisting the upturn.

In response to the pick-up in demand, Indian goods producers scaled up production in January. Moreover, 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.