The Nikkei India Manufacturing PMI's headline index fell from 54.4 in October, its highest level in twenty-two months, to 52.3 in November. Although the PMI survey still indicates expansion in India's manufacturing sector, this sign of weaker activity in November appears to be at least partly due to the Indian government's decision early in the month to withdraw high-denomination currency notes as legal tender. This decision has led to shortages of cash in the economy and, in the near term at least, has caused significant disruption and uncertainty for businesses and consumers.
The survey's output index indicates that production increased in November but at a slower pace than in October, which had been a four-year high. Consumer goods producers reported the sharpest slowdown in growth, suggesting a significant impact there from the currency changes. The survey also indicates that new orders in the index rose at their slowest pace since July, with new export orders also losing some momentum. In additions, respondents cited cash issues as a factor driving slower growth in input purchases. So far, however, there appears to be little impact on employment in the sector, with the relevant index broadly unchanged in November. Input prices rose, but at a slower pace, and nearly all respondents reported no change in their selling prices in November.
This survey is one of the first data releases to show the impact of the government's currency decision, with respondents clearly identifying cash shortages as a factor that has already weighed on activity in recent weeks. Many have also indicated that they expect further disruption to business in the near-term, suggesting the headline index may fall further next month. Nevertheless, for now the index continues to show expansion in the sector, and some respondents have also suggested that the government's decision may help their business in the longer term. In particular, this decision, aimed at curbing tax avoidance and corruption, may damage non-compliant firms, while eventually driving more business to compliant firms.
The Manufacturing Purchasing Managers' Index (PMI) is a joint publication by Markit and the Nikkei media organisation and provides an estimate of manufacturing business activity for the preceding month. The report uses information obtained from a representative sector survey incorporating around 400 companies in eight broad categories. Results are synthesised into a single index which can range between zero and 100. A reading above (below) 50 signals rising (falling) activity versus the previous month and the closer to 100 (zero) the faster is activity growing (contracting).
Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic survey data such as the Markit PMIs, investors will know what the economic backdrop is for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly and causing potential inflationary pressures.
The Markit PMI manufacturing data give a detailed look at the manufacturing sector, how busy it is and where things are headed. Since the manufacturing sector is a major source of cyclical variability in the economy, this report has a big influence on the markets. And its sub-indexes provide a picture of orders, output, employment and prices.
The HSBC India Manufacturing PMI is based on data compiled from monthly replies to questionnaires sent to purchasing executives in over 500 manufacturing companies. The panel is stratified geographically and by Standard Industrial Classification (SIC) group, based on industry contribution to Indian GDP. Survey responses reflect the change, if any, in the current month compared to the previous month based on data collected mid-month. For each of the indicators the 'Report' shows the percentage reporting each response, the net difference between the number of higher/better responses and lower/worse responses, and the 'diffusion' index. This index is the sum of the positive responses plus a half of those responding 'the same'.