EXPLAINED | What Is PMI? Why India’s Factory Score Fell but Still Signals Growth

Why is India’s manufacturing PMI in the news?

India’s factories continued expanding in October, although the pace eased from September. That is the message from the HSBC India Manufacturing Purchasing Managers’ Index, or PMI, released on November 2.

The index fell to 54.7 from 55.1. Export orders grew faster, but overall growth in production and new orders softened. Employment increased only modestly.

The fall signals slower improvement in manufacturing conditions. It does not, by itself, mean factories produced fewer goods than in September.

First, what exactly is PMI?

PMI is a monthly survey that asks businesses what has changed since the previous month.

Are orders increasing? Is production rising? Are firms taking on workers? Are supplies arriving faster or more slowly?

Purchasing managers help arrange the materials a business needs. Their work puts them close to changes in demand and production requirements. India’s manufacturing survey draws responses from a panel of around 400 manufacturers, selected to reflect different industries and company sizes. S&P Global compiles it; HSBC sponsors it.

It is a survey of businesses, rather than a count of every factory’s production.

Why is everyone obsessed with 50?

Because 50 separates an overall increase from an overall decrease compared with the previous month.

A reading above 50 signals expansion. Below 50 signals contraction. A reading of 50 signals no overall change.

Crucially, 54.7 is an index reading. It does not mean production grew by 54.7%, or by 4.7%. It does not mean 54.7% of factories are growing either.

The number summarises the balance of survey responses across several measures of business activity.

How can the number fall while factories keep growing?

Because the direction of growth and its pace are different questions.

October’s reading remained above 50, signalling continued expansion. Its fall from September indicated that the improvement had lost some momentum.

The same distinction works when readings are below 50. A rise towards that line can signal that contraction is easing, while conditions are still deteriorating overall.

Reading only “PMI falls” can, therefore, leave you with the wrong impression. Check where the number sits relative to 50 as well as how it changed.

How do answers from businesses become one number?

For each survey measure, companies report an increase, a decrease or no change. The calculation adds the percentage reporting an increase to half the percentage reporting no change.

The headline manufacturing PMI then combines five measures. New orders carry 30% of the weight, production 25% and employment 20%. Supplier delivery times account for 15%, with stocks of purchased materials contributing 10%.

New orders receive the biggest weight because fresh business can signal what factories will need to produce next.

Are exports, prices and business confidence all inside that score?

The wider survey tracks export orders, costs, selling prices and expectations for future production. These help explain changes beneath the main number; they are not all separate ingredients in its calculation.

That is why October could show a lower headline PMI alongside stronger growth in export orders. Different parts of a business can move at different speeds.

Why did stronger exports not produce a hiring boom?

The October survey showed export-order growth reaching a six-month high, while employment rose only slightly. Some manufacturers added workers; capital-goods producers, which make machinery and equipment, cut staff.

An increase in orders does not establish how many additional workers firms need. Businesses may have room to raise output with their existing workforce. Hiring also depends on whether managers expect demand to last.

PMI’s employment measure captures the direction of staffing changes among respondents. It does not provide a national total of jobs created.

Do easing price pressures mean things will get cheaper?

October’s report showed manufacturers’ costs rising more slowly. Their selling prices also increased at the weakest pace in nearly four years. Prices were still rising.

A slower increase in factory prices does not guarantee a cut in the price on a shop shelf. Transport, distribution and retail costs also affect what buyers pay.

Nor can this manufacturing survey tell us what happened to every household expense. Rent, school fees and many services lie outside its scope.

How does PMI differ from India’s official factory-production data?

The official Index of Industrial Production, or IIP, tracks changes in the volume of a basket of industrial products. It covers manufacturing, mining and electricity.

PMI asks businesses how conditions changed from the previous month and provides an early signal. Its headline also includes orders, employment and other measures beyond production.

The two, therefore, answer different questions. PMI can flag a turning point quickly; official production data help establish what happened to measured output.

Manufacturing PMI also covers only one part of the economy. Services have a separate survey. A combined reading brings manufacturing and services together.

What should we watch next?

Check whether new orders keep expanding, whether hiring strengthens and whether firms remain confident enough to increase production.

October’s manufacturers accumulated finished goods at a record pace, saying they were preparing for demand and guarding against shortages. Business confidence nevertheless weakened. Subsequent orders and sales will help show whether those stocks were well judged.

The services PMI, due on November 4, will add another part of the picture. Later official production data will offer a further check.

When the next headline arrives, ask three questions: Is PMI above or below 50? Is it rising or falling? What do orders, jobs and prices reveal underneath?