Fall in IHS Markit India Services Business Activity Index | 07 Apr 2020

Why in News

The IHS Markit India Services Business Activity Index (i.e Service Purchasing Managers’ Index (PMI)) was at 49.3 in March, down from February’s 85-month high of 57.5.

Key Points

  • The Index is compiled by IHS Markit for more than 40 economies worldwide. IHS Markit is a global leader in information, analytics and solutions for the major industries and markets that drive economies worldwide.
  • The fall implies contraction in India’s services sector activity during March basically due to COVID-19.
    • The COVID-19 pandemic has reduced demand, particularly in overseas markets. Nationwide store closures and prohibition to leave the house weighed heavily on the services economy.
    • In PMI parlance, a print above 50 means expansion, while a score below that denotes contraction.
  • The Composite PMI Output Index that maps both the manufacturing and services sector also fell to 50.6 in March, down 7 points from February’s 57.6.
    • This signals a sharp slowdown in private sector output growth and brought an abrupt end to the recent strong upward-moving expansion trend.

Purchasing Managers' Index

  • PMI is an index of the prevailing direction of economic trends in the manufacturing and service sectors.
  • It consists of a diffusion index that summarizes whether market conditions, as viewed by purchasing managers, are expanding, staying the same, or contracting.
  • The purpose of the PMI is to provide information about current and future business conditions to company decision makers, analysts, and investors.
  • It is different from the Index of Industrial Production (IIP), which also gauges the level of activity in the economy.

Index of Industrial Production

  • The Index of Industrial Production (IIP) is an index which details out the growth of various sectors in an economy such as mineral mining, electricity, manufacturing, etc.
  • It is compiled and published monthly by the Central Statistical Organisation (CSO), Ministry of Statistics and Programme Implementation.
  • The Base Year of the Index of Eight Core Industries has been revised from the year 2004-05 to 2011-12 from April, 2017.
    • The eight core industries comprise 40.27% of the weight of items included in the Index of Industrial Production (IIP).
    • The eight Core Industries in decreasing order of their weightage: Refinery Products> Electricity> Steel> Coal> Crude Oil> Natural Gas> Cement> Fertilizers.

Difference between PMI and IIP

  • IIP covers the broader industrial sector compared to PMI.
    • Index of Industrial Production (IIP) measures growth in the industrial sector.
    • IIP shows the change in production volume in major industrial sub sectors like manufacturing, mining and electricity.
    • Similarly, the IIP also gives use based (capital goods, consumer goods etc) trends in industrial production.
  • PMI is more dynamic compared to a standard industrial production index.
    • The PMI senses dynamic trends because of the variable it uses for the construction of the index compared to volume based production indicators like the IIP.
    • For example, new orders under PMI show growth oriented positive trends and not just volume of past production that can be traced in an ordinary Index of Industrial Production.

Source: TH