Manufacturing PMI inches up, but contraction continues

NEW DELHI: India’s manufacturing activity contracted for the second month in a row in September but the extent of contraction was less than in the previous month, a private survey showed on Monday.


The seasonally adjusted HSBC Purchasing Managers’ Index (PMI) rose to 49.6 in September from 48.5 in August. A reading of 50 separates growth from contraction.

The survey-based index, compiled by Markit, is designed to measure the overall health of the manufacturing sector. “Manufacturing activity continued to shrink in September. Order flows remain weak, especially export orders, and employment fell,” Leif Eskesen, chief economist for India and ASEAN at HSBC, said in a release.

Output and new orders contracted, but at a slower pace than in August, forcing companies to cut back on employees for the first time since February 2012.

A bright spot in the data, however, was a pick up in capital goods segment, an indicator of investment activity.

“Sector data highlighted capital goods as the best performing sub-sector in September, with production, new orders and purchasing activity all expanding,” HSBC said in a statement.

This suggests that the strong 15.6% rise in production of capital goods in July, shown by the Index of Industrial Production (IIP), could sustain in the coming months. The IIP data for August will be released on October 11.

But overall, the PMI has not been a good indicator of manufacturing activity gauged by the official IIP. The PMI showed manufacturing activity fell to its lowest in over four years in August, but core sector data released on Monday suggested a rise in manufacturing growth from 3% in July.

The output of eight core industries, which have a 38% weight in IIP, rose at its fastest pace in seven months in August.

In a note last month, Credit Suisse said policy makers and forecasters pay close attention to PMI. “However, a close inspection of their historical relationship with industrial production and service sector growth suggests that they should often be taken with a sizeable pinch of salt,” the note said.

“This is particularly true of the service sector PMI, which has a correlation of just 0.09 with real service sector growth over the past two years,” the brokerage said, adding that for lengthy periods when manufacturing PMI has deviated from recorded industrial growth.

The latest PMI survey showed contraction of exports business accelerated to its quickest in two years. This slump is contrary to the double-digit growth recorded in July and August.

Partly, the deviation can be explained by the fact that industrial growth is calculated year-on-year, whereas the survey-based PMI measures activity with reference to the previous month.