SBI COMPOSITE INDEX - BETTER INDICATOR THAN IIP OR PMI?
By Ruma Dubey
Better late than never.
We finally have an Index, just like HSBC’s PMI index and it comes from none other than State Bank of India (SBI), the largest public sector bank in India.
This is an idea which was waiting to happen and probably it took SBI a few months or maybe even years to finally put this Index into place. Instead of following HSBC’s index, through which we try to draw inferences for IIP, it’s a relief to know that we can now bank on SBI Index. A quick look at what this is all about:
Q:What is this SBI Index?
A: Known as ‘SBI Composite Index’ unlike the IIP, is more of a forward looking economic indicator, showing us how the economy is functioning and even how banks are preparing to deal with it.
Q: How does this Index work?
A: It will track the manufacturing activity in the country based on the growth in the bank’s loan book; after all SBI alone commands one-fifth of the banking share of India and 70% of credit market. It will also track other indicators like financial markets, forex rates, trend of commodity prices, inflation, export-import figures, consumer spending, mining activity and SBI’s own performance across all sectors. Given the huge reach of SBI, this index makes sense as SBI activity truly reflects the credit demand in the economy.
Q: Whom does it help?
A: Most obviously the economists and analysts first. Since the Index will analyze data from services as well as manufacturing industries, it will be able to give a correct picture of whether the economy is expanding or contracting. It will thus help even policy makers, especially RBI, to look at turning points in the business/manufacturing cycles, much before IIP comes in. This advance intimation will help those in the industry to adjust their investment or marketing strategy.
Q: How will this Index appear?
A: Well, like any other index. Unlike IIP, this one will have two components of the manufacturing cycle – MoM and YoY – which in turn means there are two separate indices. Each is on a scale of 0 to 100. And any reading above 50 will indicate an economy which is growing and lesser than 50, will naturally mean contraction – on MoM as well as YoY. The index will be published on a monthly basis. It will track two months in advance the possible trends in official estimates, which is the IIP.
Q: How is it different from IIP?
A: 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 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. 2004-2005 is considered as base year for calculation. i.e. the industrial output in 2004-2005 is considered as 100 index points. And it also takes into account micro, small and medium enterprises. In that sense, SBI Index is forward looking.
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.
Q: And how is the SBI Composite Index different from the PMI numbers?
A: The Purchase Manager Index or PMI, compiled by HSBC, once again like the SBI Index and 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. SBI Index uses actual figures based on loan book thus there is no question of ambiguity due to survey; it is pure data based and shows us real disbursements and not based on any Purchase manager.