PMI OR IIP – WHAT WILL RBI LOOK AT?

By Ruma Dubey

The call for a rate cut, not 25 bps but a 50 bps just got louder!

Today, the Nikkei India Manufacturing Purchasing Managers Index (PMI) was announced. It came in at 47.9% for July v/s 50.9% in June. This is for the first time this year that manufacturing has contracted and this is at the lowest level since Feb 2009.

IIP is two months behind – the May IIP was lower at 1.7% v/s 2.8% (MoM). The June IIP is scheduled to be announced on 11th August evening. The only solace – at least both are showing a slowdown.

Now the BIG question which looms large is – will the RBI consider PMI or IIP? But many say that strictly speaking, PMI and IIP cannot be compared at all as it is akin to comparing oranges with apples. Simply put, IIP captures actual YoY growth while PMI captures MoM business sentiments.  PMI has been bad while IIP good as PMI is a reflection of the sentiment while IIP is inundated with data collection and collation problems.

So then what exactly is PMI?  This is a relatively new concept and we have been seeing HSBC putting up India’s PMI numbers every month. This PMI, like the IIP reflects the economic health of the manufacturing sector.  It has five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. As the name indicates, it reflects the purchasing power of the managers, which in turn gives a peek into the demand. So a rise in PMI means demand is up for goods and services. This index is calculated purely on survey, with seasonal adjusted variables but does not include the unorganized sector; a huge negative against PMI as India continues to be largely dominated by the unroganised sector.

On the other hand, IIP measures the growth of output from various sectors. The weightage of IIP data is broadly divided into three segments – manufacturing (75.53%), mining & quarrying (14.15%) and electricity (10.32%). The numbers for IIP are usually released within 6 weeks after the end of the month. The figures are revised in the next and the third month based upon the revised Industrial production data furnished by the source agencies. The data is collected from Department of Industrial Policy and Promotion, Indian Bureau of Mines, Central Statistical Organization, Central Electricity Authority and 11 other agencies. 2011-2012 is considered as base year for calculation. i.e. the industrial output in 2011-2012 is considered as 100 index points. And it also takes into account micro, small and medium enterprises.  Thus in many ways IIP is more comprehensive than PMI.

But the biggest problem with IIP is the way in which data is collected, which causes data to be volatile. Capital goods sector is an example pointing exactly to that aspect. Capital goods include cables and wires, metal ancillaries, rubber and plastic goods, among others and like every month, data continues to remain volatile.

Many economists say that data collection in IIP could be plagued with two problems – either data does not get collected every month and when it does get collected, it is all tallied up in one single month and thus the irrational volatility. Or else data is coming in from only a handful plants and then it is generalized for the entire sector.

The Govt too is worried about the integrity of this data. The Govt is exploring the possibility of setting up a single agency to collect data for compiling IIP and even inflation, instead of depending on so many agencies. There is also talk that it will also include items like tablets and reduce weightage given to desktops.

The Govt surely needs to rework the way data is collected, classified and collated. Policy decisions, especially those by RBI are based on IIP and it is imperative that it is accurate. And thanks to PMI, comparable or not, at least there is awareness that the accuracy of IIP needs attention. That’s a big step in itself.