The latest index of the industrial production (IIP) data showed manufacturing growth slowed down considerably in July, while the manufacturing PMI (Purchasing Managers’ Index) for the same month painted a rosy picture of the economy. The divergence, economists said, stems from the very fact that both are measured differently and present different aspects, and are, therefore, not comparable.
While the manufacturing PMI had hit 56.4 in July, indicating a robust performance (reading above 50 suggests expansion), the growth in manufacturing (in the IIP) plunged to 3.2% from a year before from 13% in the previous month. Between April and July, manufacturing IIP rose just 2.6% over the pre-pandemic period (same months in 2019).
Some analysts said that the PMI survey covers larger companies, and therefore, reflect their performance only, while the IIP’s universe is much wider that accommodates smaller players as well. So, the IIP’s tepid performance in July is reflective of the broader stress in the manufacturing sector. However, some others seek to focus more on the difference between the two gauges to argue they are not strictly comparable.
Pronab Sen, former chief statistician and chairman of the National Statistical Commission, told FE: “The primary difference between the two gauges is that the IIP growth is measured year-on-year, while the PMI is measured month-on-month. This means the seasonality effect has to be factored in while analysing the PMI.” Moreover, the IIP is notorious for fluctuations, primarily due to the capital goods segment where the volatility is structural. So, one month’s (July’s) performance shouldn’t be viewed with much too seriousness, Sen said.
DK Pant, chief economist at India Ratings, echoed the view. “We know economic indicators have seasonality and if seasonality is not removed, we may derive wrong inference.” The disconnect between the two indices is not new, Pant said, adding that different sample sizes could be one reasons for the divergent trend.
Icra chief economist Aditi Nayar said: “A difference in the coverage of the manufacturing portion of the IIP and the respondents to the PMI manufacturing survey may be leading to the divergence between the assessment provided by them.”
Yes Bank chief economist Indranil Pan said while PMI is based on merely surveys and offers a direction (of manufacturing activity), the IIP is based on hardcore data. “Moreover, if the PMI is above 50, it suggests expansion but it doesn’t tell you the extent of the expansion. But since the IIP offers hardcore output data, it’s a more credible indicator of the state of manufacturing than the PMI,” Pan said.