Normally a great deal of value is attached to any index framed to measure the activity level of a specific phenomenon.
Normally a great deal of value is attached to any index framed to measure the activity level of a specific phenomenon. The indices for competitiveness, doing business, industrial and sectoral output, health and family welfare indicators carry huge importance in evaluating the current status and also to predict the future. All major countries in the world, including India, regularly release PMI or Purchasing Managers Index.
Based on a survey of around 500 purchasing executives in the private sector giving feedback on 5 most critical activities like new orders, output, employment, suppliers’ delivery times and stocks of purchases, the feedback collected there off are compiled by a group of experts/economists and released after the month is over, first with manufacturing, second with construction and the third with the service sector.
If 100% respondents report no improvement in investment/business scenario, we get a figure of 50 which is taken as a threshold limit of business situation (P1*1+P2*0.5+P3*0, where P1= improvement response, P2= no change response, P3=declining response). The IIP, on the other hand, is based on the reported output of around 682 items covering manufacturing (77.6% weightage), mining (14.4% weightage) and electricity (8.0% weightage).
Should there be a linkage between PMI and IIP? Historically it has been seen that no one-to-one correspondence exists between the two indicators. It sounds logical as the feedback through survey of private business may not get translated into actual production and by definition excludes public enterprises. However, in case of India the connectivity between these two indicators is not remote.
To prove this, let us analyse the trend in the last 4 months. In January 2018, IIP and PMI were 7.5% (growth), 52.4 (decline). It became 7.0% (decline) in February 2018 with PMI at 52.1 (decline). Following month, IIP was 4.6% (decline), PMI at 51 (decline). In the first month of the current fiscal, IIP was 4.9% (growth) with PMI standing at 51.6 (growth). The rising business expectation on new orders (PMI) does lead to more output (IIP) and therefore employment, reduction of suppliers’ delivery times and bringing down stocks of purchases. But to sustain this linear relationship, a great deal depends on various other external factors.
In India, the private corporate investment has been the laggard which restricted the flow of investment into infrastructure including construction, warehouses, roads and real estates. This has undermined the demand for cement and steel, specifically as these two items comprise around 25-30% share of material consumption. The private sector investment as a percentage of GDP has moved down from 27.0% in FY12 to 24.2% in FY14 and to 21.9% in FY16.
From a global perspective, it is the flow of new orders that is considered as a single most critical factor influencing the PMI. In countries like Brazil, Russia, South Korea and Turkey, a decline in the overall industrial performance is visible and it is reflected in the movement of PMI. The output, new orders, employment, exports in these countries are rising but at a much slower rate. A positive outlook is observed in the US and the EU. It is pertinent to note that there is an increasing threat posed by US tightening of imports.
The private corporate investment is crucially linked with what is increasingly perceived as trade protectionism. All steel exports (Ch.72 and 73) to the US have become prohibitive. A series of retaliatory tariff measures have been adopted against US exports by China, India and others which has made the trade scenario utterly unpredictable. The fluctuating movement of prices of major raw materials namely, coking coal, iron ore and melting scrap is another worrying factor and would act as deterrents to investment prospects by the private sector.
In the midst of all these factors, the consumption growth in steel achieved by India during Q1 of the current fiscal at 8.4% is welcome. While crude steel production at 26.1MT has maintained a growth rate of 6.2%, the total steel imports at 1.9 MT with a growth of 10.9% and total exports at 1.4MT with a negative growth of 33.7% are spoilsports.
The import growth and decline in exports signal a marked departure from the trend observed a few months ago. Under Asia-Pacific Trade Agreement signed in 1975 between China, Korea, Bangladesh, Sri Lanka, Laos and India, in respect of tariff classification 7206-7306 India is to reduce import duties by 10-45% for 0.351 MT of steel imported from APTA members.
This would imply reduction of duties on HRC and coated products from 12.5% to 6.88-10.63% and on long products from 10% to 5.5-9.0%. For SS products the duty reduction would be from the current 7.5% to 4.13-6.38%. In view of stiff duty imposts by the US on steel imports, the above duty reduction by India may lead to further escalation of steel imports by diverted exports from the US. And this risk factor may not work favourably on raising PMI in the next month.
The author is DG, Institute of Steel Growth and Development
(Views expressed are personal)