There are two key parameters that the government and private sector analysts use to gauge the level of activity in the manufacturing sector — the Index of Industrial Production (IIP) and the Manufacturing Purchasing Managers’ Index (PMI).
What is manufacturing PMI?
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There are two main points of difference between the PMI and the IIP. The first is that the PMI is a private sector survey while the IIP is gauged by the government.
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The second difference is in what is being measured. While the IIP is a measure of output, PMI, as the name suggests, measures activity at the purchasing or input stage.
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Together the two indices provide a composite and reasonably comprehensive information about the formal manufacturing sector. As with the IIP, the PMI suffers from the lacuna of not measuring informal sector activity.
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Another factor to be kept in mind is that both the PMI and the IIP are based on surveys and hence, represent only a sample of the entire formal manufacturing sector.
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In addition, as with all surveys, the two are also susceptible to sampling errors, errors in assigning weights to various indicators and errors that creep in due to inaccurate responses.
How is the PMI survey conducted?
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The Nikkei India Manufacturing PMI is based on data compiled from monthly survey responses by purchasing managers in more than 400 manufacturing companies.
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The manufacturing sector is divided into eight broad categories — basic metals, chemicals and plastics, electrical and optical, food and drink, mechanical engineering, textiles and clothing, timber and paper and transport.
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The survey responses are meant to reflect month-to-month changes based on the data collected mid-month. For each of the indicators, the report shows the percentage reporting each response, the difference between the number of higher or better responses and lower or worse responses and something called a ‘diffusion’ index.
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Diffusion indexes have the properties of leading indicators and are convenient summary measures showing the prevailing direction of change.
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The Nikkei India Manufacturing PMI is composite index based on five individual indices with their own weightages — new orders (weightage 0.3), output (0.25), employment (0.2), suppliers’ delivery times (0.15), stock of items purchased (0.1) and the delivery times index inverted so that it moves in a comparable direction.
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Once the overall number for the month is computed, the score is arrived at. A score above 50 denotes expansion while one below 50 signifies contraction.