The Nikkei India Manufacturing PMI's headline index fell for the second consecutive month in December, dropping to 49.6 from 52.3 in November. This is the first time the index has printed below 50 - indicating contraction in the sector - since December 2015. Survey respondents widely attributed this to the ongoing impact of cash shortages caused by the Indian government's decision early in November to withdraw high-denomination currency notes as legal tender.
These cash shortages have caused significant disruption to both activity and confidence among businesses and consumers. Survey respondents reported a moderate fall in output, with the production index dropping below 50 for the first time in 2016, while the new orders and new export orders indices also showed sub-50 readings.The survey's employment index also indicated some job losses in the manufacturing sector, but most respondents reported unchanged employment levels, perhaps suggesting that many expect the impact of cash shortages to be short-lived.
The survey showed slightly stronger growth in input costs but a weaker increase in output prices.
Although the PMI survey shows there has been a clear impact from cash shortages in November and December, strong numbers for October mean that the quarterly average for the headline index was little changed from the previous quarter. This, in turn, suggests that manufacturing will still make some positive contribution to GDP growth in the quarter despite the PMI survey showing a contraction in the sector in December. However, a quick resolution to the problems caused by cash shortages will likely be required for the sector to rebound back into expansion territory in the new year.
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'.