‘Demonetisation dents private sector activity’

The Nikkei Markit India Composite Purchasing Managers’ Index (PMI) Output Index declined to 49.1 last month -- down from October’s 45-month high of 55.4.  An index reading of above-50 indicates an overall increase in economic activity, and below-50 an overall decrease. The contraction in the key macro-economic data was witnessed after services sector and new business across the private sector as a whole decreased. The report on the Composite PMI Output Index says though the scarcity of rupee notes weighed on manufacturing performance, new order growth was sustained. 

However, the rise was insufficient to offset the downturn in services and new business across the private sector. The seasonally adjusted Nikkei India Services Business Activity Index, too, registered a contraction at 46.7 during last month, down from October’s 54.5.  This is the first time the index contracted since June 2015, the sharpest reduction in output for almost three years. “The latest set of gloomy PMI figures for the Indian service sector shows that companies were heavily impacted by the 500 and 1,000 rupee notes ban,” says Pollyanna De Lima, Economist at IHS Markit. 

“Cash shortages resulted in fewer new business intakes, which in turn caused a fall in activity and ended a 16-month sequence of expansion.”  The disruption is expected to be short-lived, with many panellists in the survey anticipating a pick-up in activity as these high-value banknotes are replaced and black-market firms end their operations. “Business confidence improved to a three-month high. On a positive note, the reduction in money supply curbed inflation in November,” the economist said. 

“Input costs facing service providers were broadly unchanged, which encouraged firms to lower their selling prices. In light of these numbers, further cuts to the benchmark rate are expected.” A factor contributing to the downward movement in the PMI was a softer expansion in new business inflows at services firm.  The fall in new work was the first in 17 months and the steepest in over three years. Panellists indicated cash shortages restricted client bookings. “Service providers expect activity to rise over the next year, with the degree of optimism signalled in November being the highest since August.”