DAILY NEWS ANALYSIS
10 January, 2020
4 Min Read
Syllabus subtopic: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
Prelims and Mains focus: About the economic slowdown and its impact on this year’s budget; measures to be taken to address it; About PMI
Context: Finance Minister Nirmala Sitharaman will present her second budget at a time when the economy has hit rock bottom, with growth plummeting to a six-and-a-half-year low and dismal revenue growth, besides ongoing tensions in West Asia threatening to set oil prices soaring to unsustainable limits.
Performance of various indicators
What has been the approach of the govt? so far?
Performance on the fiscal front?
Leveraging the FFC
Concerns for India’s GDP
What should the govt? do?
About Purchasing Managers’ Index
PMI or a Purchasing Managers’ Index (PMI) is an indicator of business activity — both in the manufacturing and services sectors. It is a survey-based measure that asks the respondents about changes in their perception of some key business variables from the month before. It is calculated separately for the manufacturing and services sectors and then a composite index is constructed.
How is the PMI derived?
The PMI is derived from a series of qualitative questions. Executives from a reasonably big sample, running into hundreds of firms, are asked whether key indicators such as output, new orders, business expectations and employment were stronger than the month before and are asked to rate them.
How does one read the PMI?
A figure above 50 denotes expansion in business activity. Anything below 50 denotes contraction. Higher the difference from this mid-point greater the expansion or contraction. The rate of expansion can also be judged by comparing the PMI with that of the previous month's data. If the figure is higher than the previous month’s then the economy is expanding at a faster rate. If it is lower than the previous month then it is growing at a lower rate.
What are its implications for the economy?
The PMI is usually released at the start of the month, much before most of the official data on industrial output, manufacturing and GDP growth becomes available. It is, therefore, considered a good leading indicator of economic activity. Economists consider the manufacturing growth measured by the PMI as a good indicator of industrial output, for which official statistics are released later. Central banks of many countries also use the index to help make decisions on interest rates.
What does it mean for financial markets?
The PMI also gives an indication of corporate earnings and is closely watched by investors as well as the bond markets. A good reading enhances the attractiveness of an economy vis-a-vis another competing economy.
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