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ZappChai explainers - What is PMI?

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If you've been tracking the news you would have noted PMI numbers which were typically around 50 plummet to extremely low levels, with the services PMI hitting single digits. But what is this PMI, how is it measured, and why is it important? In today's post, we try to look at all this and more.

What is PMI?

The PMI, which stands for the Purchasing Manager's Index, is measured separately for the manufacturing and services sector. It is effectively a survey of managers across a wide spectrum in the manufacturing and services sectors that seeks to understand their opinion on a variety of factors. On the manufacturing front 500 companies are surveyed with five factors new orders, output, employment, supplier's delivery time, and stock purchased having 30%, 25%, 20%,15%, and 10% weights respectively. Services surveys 350 companies tracking sales, employment, inventory, and prices.

Measured at the start of every month, this is a forward-looking indicator, giving you a feel of what top managers in the country are experiencing significantly before the official numbers for the month come out. With an improvement in a factor marked at 100%, and no change marked at 50%, a number above 50% indicates an improvement in expected business activity and similarly, a drop indicates deterioration.

So how do these numbers look like today?

Understandably when business is running, as usual, the number moves slightly around the 50% mark, offering important insight, but nothing too dramatic. Which is why the current swing in PMI numbers came as a shock to many.

The services PMI in India took the sharpest beating, falling from 49.3 to 5.4. Yes, there is no 0 missing there, the PMI actually dipped into the mid-single digits. Things on the manufacturing side while quite severe were better than the conditions in services, with the index falling to 27.4.

In a market where business is grinding to a halt, such a drop is probably understandable. What is surprising though is the steepness of the fall we've had, with our 3 month fall in PMI being the highest in the world, ahead of countries like Italy, Spain and the US. Indonesia falls at #5 in terms of the speed of the fall with Vietnam at #10.

The road ahead

While we would love nothing better than giving this a positive spin, the truth is things could actually be worse. These indices typically capture the sentiment of only the large firms in the country. MSMEs and other cash strapped enterprises are likely to find themselves in a much worse spot than some of the larger players who would have a better cash position and more importantly better access to credit at reasonable levels.

For a country which derives an overwhelming percentage of our GDP from the services sector, the drop on the services side is especially worrying. Travel and hospitality, a sector that employs millions both formally and informally will continue to remain under stress even post business openings. Similar trends are also expected in the entertainment business. The road ahead seems darker than we earlier envisioned, and it would be fair to expect further drops in the GDP expectations of major fund houses.

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