In a positive development for the Indian manufacturing sector, the Nikkei India Manufacturing Purchasing Managers’s Index (PMI) recorded a 5-year high of 54.7 in December from 52.6 in November. The figures definitely indicate a recovery in the manufacturing activity after Indian economy was hit by demonetisation and Goods and Services Tax (GST). According to reports, India’s manufacturing PMI has witnessed an expansion for most of the time during this fiscal. As per the latest survey, the new orders sub-index, which is a proxy for domestic demand, witnessed to 56.8 in December, which makes it highest since October 2016.

What is Purchasing Manager Index (PMI)?

Based on new orders, inventory levels, production, supplier deliveries and the employment environment, the Purchasing Managers’ Index (PMI) is an indicator of the economic health of the manufacturing sector. The PMI of any country’s manufacturing sector is analysed to provide information about current business conditions to company decision makers, analysts and purchasing managers. It is calculated by gathering information using monthly surveys sent to purchasing executives at approximately 300 companies. A PMI figure of above 50 represents an expansion of the manufacturing sector if compared to the previous month while a PMI under 50 represents a contraction. If PMI figure stays at 50 then it indicated no change.

How India’s factory activity has hit a five year high?

According to industry experts, a surge in output and a new order was the reason behind the rise in India’s factory activity. Reports suggest that the output improved at its fastest pace since December 2012 and new order to the manufacturing markets increased at their quickest since October 2016.

Economist at IHS Markit, which compiles the survey, Aashna Dodhia said, “India’s goods-producing economy advanced on its recovery path, with operating conditions improving at the strongest pace since December 2012. The strong business performance was underpinned by the fastest expansions in output and new orders since December 2012 and October 2016 respectively. Anecdotal evidence pointed to stronger market demand from home and international markets.”

Economist Aashna Dodhia further added, “Challenges remain as the economy adjusts to recent shocks, but the overall upturn was robust compared to the trend observed for the survey history. This outlook was shared by the manufacturing community as sentiment picked-up to the strongest in three months amid expected improvements in market conditions over the next 12 months,” Dodhia added.

Meanwhile, apart from rising India’s factory activity, employment generation was also at its highest since August 2012. While, the rise in India’s factory activity has come as a welcome sign for the economy, at the same time, rising price was still a concern for the Reserve Bank of India (RBI) as it will act as pressure from slashing interest rates further.