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Demonetisation drags India factory output growth lower in November
Reuters | Photo Credit: Reuters

Manufacturing activity in India slowed sharply in November after Prime Minister Narendra Modi's shock decision to withdraw high-value banknotes caused a cash crunch and crimped consumption and output, a private survey showed on Thursday.

The Nikkei India Manufacturing Purchasing Managers' Index slipped to 52.3 in November from October's 22-month of 54.4, according to data compiled by IHS Markit.

“PMI data for November showed that the sudden withdrawal of high-value banknotes in India caused problems for manufacturers, as cash shortages hampered growth of new work, buying activity and production,” Pollyanna De Lima, economist at IHS Markit, said in a statement.

Modi’s decision on 8 November to scrap currency notes of Rs 500 and Rs 1,000 denomination was aimed at combating graft, forgery and tax evasion. But it has led to a severe cash crunch in the economy, hurting several sectors and consumption. This has prompted analysts and economists to revise their growth estimates lower.

Fitch Ratings has cut India's GDP growth forecast for this fiscal year to 6.9% from 7.4% while Deutsche Bank expects full-year growth at 6.5%. The government on Wednesday said the economy grew 7.3% in the second quarter through September.

Markit also said that the index stayed above the 50 mark, which indicates growth, for the 11th month in a row.

“Although many surveyed companies commented that further disruption is expected in the near term, the demonetisation of the rupee is anticipated to ignite growth in the long run as unregulated companies leave the market,” said De Lima.

For now, however, companies have signalled softer increases in order books, buying levels and output. Growth in order books was the slowest since July and the upturn in new export orders lost some momentum.

The survey reported higher demand from domestic as well as external clients, but hinted that the cash crisis hampered growth. In terms of sectors, consumer goods producers recorded a sharp slowdown in growth. 

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