Context: The manufacturing sector in India showed signs of slowing down, with factory activity dropping to a 12-month low in December 2024. Various concerns like reduction in export orders, rise in input costs cast a shadow on future growth expectations.
Relevance of the topic:
Prelims: Key facts about the Purchasing Managers’ Index (PMI).
Mains: Manufacturing Sector: Trends, Challenges, Way Forward
Highlights of HSBC survey on India’s Manufacturing Purchasing Managers’ Index (PMI)
- Slip in manufacturing activity expansion:
- Manufacturing activity expansion plummeted further as per HSBC India Manufacturing Purchasing Managers’ Index (PMI).
- It dropped from 56.5 in November 2024 to 56.4 in December 2024.
- A reading of over 50 indicates a rise in activity levels.
- Reducing export orders: New export orders rose at a slower rate than total new business for surveyed factories.
- Increasing input costs: Input costs continued to firm up, with firms reporting an uptick in container, material and labour costs in December,
- Uptick in hiring:
- Manufacturing employment increase for the tenth month in a row during December
- The rate of job creation quickened to the fastest in four months.
- Around one-in-ten companies recruited extra staff, while fewer than 2% of firms shed jobs.
What is the Purchasing Managers Index?
- PMI is a survey-based measure that asks the respondents about changes in their perception about key business variables as compared with the previous month.
- PMI is compiled by IHS Markit for more than 40 economies worldwide.
- IHS Markit is a part of S&P Global.
- Purpose: To provide information about current and future business conditions to company decision makers, analysts, and investors.
- Calculation:
- It is calculated separately for the manufacturing and services sectors
- A composite index for both manufacturing and services is also created.
- The PMI is a number from 0 to 100.
- Interpretation:
- A score above 50 means expansion, while a score below that denotes contraction.
- A reading at 50 indicates no change.
- If the PMI of the previous month is higher than the PMI of the current month, it represents that the economy is contracting.
Problems in India’s Manufacturing Sector
- Stagnant growth: Share of manufacturing to India’s GDP has remained stagnant at around 17% since 1991 reforms.
- Jobless growth: due to focus on Capital Intensive Manufacturing, instead of Labour intensive manufacturing.
- Dwarf firms: MSMEs account for 45% of manufacturing output. However, the majority of MSMEs are dwarf firms which are more than 10 years old but continue to employ less than 100 people.
- Shortage of skilled labour: Only 51.25% of the assessed youths found to be employable with the required skills as per India Skills Report 2024.
- Import dependency: Over-reliance on imported raw materials and components, especially in electronics and automobiles, weakens resilience.
Way Forward
- Strengthen implementation of schemes like Production Linked Incentive schemes, Make in India, etc.
- Seamless integration with Global Value Chains.
- Increased focus on Labour intensive industries.
- Promote R&D by increasing funding for innovation and adopt Industry 4.0 technologies.