Did India grow or shrink in November? PMI, core sector data differ

The mismatch between PMI and core sector could also be due to the fact that while core sector is calculated year-on-year, PMI is calculated month-on-month.

Ahead of the Advance Estimates for 2016-17, on which assumptions for Budget 2017-18 would be based, manufacturing activities showed some signs of weakness due to cash crunch in the wake of demonetisation.

While the softness was sharp in the widely tracked Nikkei Purchasing Managers’ Index (PMI), it was somewhat moderated in the official data for the crucial eight core sector industries.

Manufacturing activities contracted for the first time in a year, as PMI slipped to 49.6 points in December, down from 52.3 in November. This also marked the biggest month-on-month decline in the index in eight years or since November 2008 when the global economy had slipped into a severe downturn after the Lehman collapse.

A reading above 50 shows growth, while one below 50 denotes fall. The last time PMI was below 50 was in December 2015 at 49.1.

However, eight core sectors showed a growth of 4.9 per cent in November, the month demonetisation was announced. Even though the growth was lower than 6.6 per cent  in the previous month, it showed an expansion and not contraction. Besides manufacturing, the core sector also included some mining segments and electricity generation.

The mismatch between PMI and core sector could also be due to the fact that core sector is calculated year-on-year, while PMI is calculated month-on-month. Also, PMI in November showed a growth at 52.3 points even though lower than 54.4 points in October.

“The sequential slowdown in core sector growth in November 2016 was modest, with a favourable base effect arising from fewer holidays relative to November 2015, abating the impact of the note ban in sectors such as electricity and coal,” said Aditi Nayar, principal economist, Icra.

However, growth of cement and steel output slowed sharply in November 2016 relative to the previous month, a clear indication of the short-term impact of the note ban on domestic demand in cash-intensive sectors such as construction and real estate, Nayar said.

While cement production expanded by only 0.5 per cent in November, against 6.2 per cent in the previous month, steel output rose 5.6 per cent, against 16.9 per cent.

It should be noted that Advance Estimates for 2016-17, to be released later this week, would have actual data for the first half of the current financial year, which showed a growth of 7.2 per cent. For the next half, Advance Estimates will have the Index of Industrial Production (IIP) for October and only core sector data for the month of November.

Former chief statistician Pronab Sen explained that some data for a few firms in IIP would also be available and it is for the Central Statistics Office to take a call on assessing whether these are representative data or not.

He said the methodology is to have actual data and then to make projections on the basis of trend in the previous year's quarters. This time, however, the impact of demonetisation would be there. So, there could be some overestimation of gross domestic product (GDP) in case this methodology is applied, he added.

“The impact of demonetisation is still unfolding. Estimating GDP for the full year in this scenario by extrapolating the trends up to October may lead to some errors,” Nayar said.

Gauging industrial production from core sector data is extremely difficult. This is so because core sector constitutes 38 per cent of IIP and the rest of the segments, particularly volatile capital sector, are crucial to know the exact impact on IIP. For instance, core sector was as high as 6.6 per cent  in October, but IIP declined 1.9 per cent  that month.

Nayar said while the favourable base effect and healthy production in the core and other organised sectors may support the growth of IIP in November 2016, the early evidence of the impact of the note ban on several unorganised sectors appears to be negative.

However, the base effect also offset the impact of demonetisation on other organised non-core sectors such as automobiles.

Although December PMI saw a mild decline in manufacturing output, the average reading for October-December remained in the 'growth terrain', suggesting a positive contribution from the sector to overall GDP in the third quarter of 2016-17, the survey said.

Several researchers and economists have lowered their near-term GDP growth forecasts in the wake of the demonetisation move, though there is a broader view that the decision would help the economy grow faster in the long run.

In PMI, cash crunch took its toll on new business orders and factory output.

"Having held its ground in November, following the unexpected withdrawal of Rs 500 and Rs 1,000 bank notes from circulation, India's manufacturing industry slid into contraction at the end of 2016," said Pollyanna De Lima, economist at IHS Markit and the author of the report.

Lima added that "cashflow issues among firms also led to reductions in purchasing activity and employment".

Survey participants widely blamed the withdrawal of high-value rupee notes for the downturn, as cash shortage in the economy reportedly resulted in fewer levels of new orders.

Businesses also highlighted challenging conditions in external markets, with a fall in new businesses from abroad ending a six-month long growth. The report said the higher prices paid for a range of raw materials made average cost burden increase for the 15th straight month in December, with the rate of inflation picking up since November.

Photograph: Amit Dave/Reuters.