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Purchasing Managers’ Index (PMI)

 

Purchasing Managers’ Index (PMI)


Context

India’s Composite Flash Purchasing Managers’ Index (PMI) rose to 60.6 in February 2025, marking an increase after three consecutive quarters of decline. This reflects strong expansion in both manufacturing and services sectors.

What is the Purchasing Managers’ Index (PMI)?

The Purchasing Managers’ Index (PMI) is an economic indicator that provides insights into business activity levels in an economy. Unlike the Index of Industrial Production (IIP), which tracks actual industrial output, PMI measures economic health at the purchasing/input stage through survey-based data from business executives.

Types of PMI:

  1. Manufacturing PMI – Tracks industrial production and factory output.
  2. Services PMI – Measures growth in the services sector such as retail, IT, finance, and hospitality.
  3. Composite PMI – A combined measure of both manufacturing and services activity.

Interpreting PMI Values:

  • PMI above 50 → Economic expansion (increased business activity).
  • PMI below 50 → Economic contraction (declining business activity).

Who Releases PMI in India?

  • S&P Global (formerly IHS Markit) conducts the PMI survey.
  • Survey Base:
    • 500 manufacturing companies for Manufacturing PMI.
    • 400 firms for Services PMI.
  • PMI is released monthly and serves as an early economic indicator before GDP and IIP data.

How is PMI Calculated?

PMI is derived from qualitative responses of purchasing managers in industries. It is based on five key indicators:

IndicatorWeightage (%)
New Orders30%
Output/Production25%
Employment Levels20%
Suppliers’ Delivery Time15%
Stock of Items10%

Each response is assigned a diffusion index score, and the PMI is calculated based on weighted averages.

Significance of PMI in Economic Analysis

1. Early Economic Indicator:

  • PMI is released before official GDP and industrial data, making it a leading indicator for economic trends.

2. Helps Monetary Policy Decisions:

  • Central banks like the RBI use PMI to track inflation trends and decide on interest rate adjustments.
  • A rising PMI indicates strong demand, which may lead to inflationary pressures.

3. Boosts Investor Confidence:

  • PMI trends influence stock markets, bond yields, and corporate earnings forecasts.
  • A high PMI attracts foreign investors and signals economic growth.

4. Trade & Industrial Strategy:

  • Helps policymakers assess industrial competitiveness and frame sectoral policies.
  • Identifies supply chain disruptions and sectoral bottlenecks.

Challenges & Limitations of PMI

  1. Sample-Based Survey:
    • PMI is survey-driven, not actual economic data, and may not fully reflect on-ground realities.
  2. Sector Bias:
    • PMI does not cover agriculture and informal sectors, which are major contributors to India’s GDP.
  3. Short-Term Fluctuations:
    • Monthly PMI data may not reflect long-term economic trends due to temporary supply or demand shocks.
  4. No Absolute Growth Numbers:
    • PMI only indicates expansion or contraction but does not measure the actual magnitude of growth.

Way Forward

✅ Improving Data Accuracy:

  • Expanding PMI surveys to small businesses, startups, and rural enterprises.

✅ Sectoral PMI Analysis:

  • Introducing separate PMI indicators for emerging industries such as technology, renewable energy, and e-commerce.

✅ Integration with Government Data:

  • Using PMI insights to complement GDP, IIP, and employment data for better policymaking.

✅ Enhanced Supply Chain Monitoring:

  • Utilizing PMI trends to predict supply chain disruptions and global trade patterns.

Conclusion

PMI plays a crucial role in economic forecasting, offering early signals of growth trends and market conditions. India’s recent PMI surge highlights strong industrial recovery and business confidence. By refining PMI methodologies and integrating them into economic planning, policymakers can ensure sustained growth and resilience in India’s economy.

UPSC Practice Questions

MCQs for Prelims

1. What does a PMI value above 50 indicate?
a) Economic contraction
b) Economic expansion
c) Fiscal deficit increase
d) Rising inflation

2. Who releases the Purchasing Managers’ Index (PMI) in India?
a) NITI Aayog
b) Reserve Bank of India
c) S&P Global
d) Ministry of Finance

3. What is the main difference between PMI and IIP?
a) PMI tracks actual industrial output, while IIP is a survey-based indicator.
b) PMI is survey-based and tracks business activity, while IIP measures actual production.
c) PMI and IIP both measure inflation.
d) There is no difference between PMI and IIP.

Mains Practice Question

Q: How does the Purchasing Managers’ Index (PMI) serve as a leading economic indicator? Discuss its relevance for monetary policy, investment decisions, and trade analysis in India. (250 words).

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