Comment | Surprisingly, PMI shows economy getting better

Manas Chakravarty

Amidst all the gloom of the December quarter GDP data and the less-than-stellar corporate earnings numbers, the Purchasing Managers’ Survey for February 2019 exudes optimism. The Nikkei India Composite PMI Output Index rose from 53.6 in January to 53.8, reflecting a solid and accelerated increase in private sector activity in the country.The index captures seasonally adjusted activity in both the manufacturing and services sectors and a reading above 50 indicates expansion from the previous month.

Both the services and manufacturing PMI saw an uptick in February, with the latter at a 14-month high. The momentum in the economy is best seen from the accompanying chart, which shows the steady improvement in new orders and in employment for both services and manufacturing. The increase in employment is a clear indicator that firms believe business will get better. Pollyanna De Lima, Principal Economist at IHS Markit, said: “Indian economic growth strengthened halfway through the final quarter of FY18 to the second fastest since last July.”

There are exceptions, of course. The services PMI survey pointed out, ‘Four of the five monitored categories registered higher activity, the exception being Real Estate & Business Services where a third successive contraction was recorded. And further, “Payroll numbers rose in four of the five broad areas of the service economy, with the upturn led by Information & Communication. Real Estate & Business Services companies bucked the general trend and recorded job shedding.”

In manufacturing, the survey said, ‘Around three times as many companies signalled expansion as those that saw a reduction. Where production rose, there were reports of strong sales growth, technological progress, welcoming government policies and favourable market conditions.”

But even with the PMI survey showing rising economic activity, there could well be a rate cut in April. That is because the bulk of those surveyed said they kept output prices and fees unchanged from the previous month.

Which is correct---the optimistic PMI data or the pessimistic GDP numbers? The PMI looks at month-on-month growth and covers only the top firms in the corporate sector. All it may be saying is that, as far as large businesses in the formal sector are concerned, the outlook is getting better. For the economy as a whole, however, the prognosis may be less comforting.