Manufacturing PMI touches 30.8 in May, points to challenges in recovery process

Indian factories recorded another tough month in May with the Purchasing Managers’ Index (PMI) touching 30.8 in the month.

Manufacturing has a share of around 15 per cent in India’s Gross Domestic Product (GDP). Despite the low share, it is supposed to generate the maximum employment -- direct and indirect.

Though the latest PMI is a tad better than April’s at 27.4, it points to another substantial decline in the health of the Indian manufacturing sector.

PMI is compiled by global economic research agency, IHS Markit, from responses to questionnaires sent to purchasing managers in a panel of around 400 manufacturers. The panel is stratified by sector and company workforce size, based on contributions to GDP.

Survey responses are collected in the second half of each month and indicate the direction of change compared to the previous month. The index is the sum of the percentage of ‘higher’ responses and half the percentage of ‘unchanged’ responses. The indices vary between 0 and 100, with a reading above 50 indicating an overall increase compared to the previous month, and below 50 an overall decrease.

Commenting on the latest reading, Eliot Kerr, Economist at IHS Markit, said the data is an indicator of a further fall in May. This result is particularly poignant given the record contraction in April, which was driven by widespread business closures. “The further reduction in May highlights the challenges that businesses might face in the recovery from this crisis, with demand remaining subdued, while the longevity of the pandemic remains uncertain,” he said.

The rate of decline decelerated, but was still the second-fastest since the series' inception in March 2005. Panellists mentioned prolonged closures at their clients when explaining the latest reduction in sales. Weak demand from international markets added to the deteriorating sales trend, with new business from abroad plunging further in May. Anecdotal evidence suggested that global measures to stem the spread of Covid-19 continued to stifle exports. Faced with a further deterioration in demand conditions, firms continued to cut back production midway through the second quarter.

The reduction was slower than April's unprecedented decline, but still severe overall. Lower production requirements saw Indian manufacturers continue to reduce worker numbers in May. The rate of workforce contraction accelerated to the fastest in the survey's history, eclipsing the previous record set in April. Similarly, goods producers needed fewer physical inputs in May and, subsequently, pared back their purchasing activity.