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India services output shrinks in November on demonetisation woes

05 December, 2016

Indian services activity contracted in November after the government’s shock decision to scrap high-value banknotes dragged demand lower, a private survey showed on Monday. 

The Nikkei India Services Business Activity Index slumped to 46.7 in November from October’s 54.5, data compiled by IHS Markit show. This is the first contraction since June 2015 and the sharpest for almost three years.

The development comes after another set of Markit data last week showed that manufacturing activity in India slowed sharply in November after the demonetisation decision.

While manufacturing still grew in November, a contraction in services output dragged the overall private-sector activity lower. The seasonally adjusted Nikkei India Composite PMI Output Index slipped from October’s 45-month high of 55.4 to 49.1 in November, below the 50 mark that indicates growth.

Prime Minister Narendra 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 economy grew 7.3% in the second quarter through September, the government said last week.

Markit said also that activity decreased in three of the six monitored sub-sectors—financial intermediation, hotels and restaurants, and renting and business activities.

“The latest set of gloomy PMI figures for the Indian service sector shows that companies were heavily impacted by the Rs 500 and Rs 1,000 notes ban,” said 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.”

There is a silver lining, though. Indian service providers expect activity to rise over the next 12 months, with the degree of optimism signalled in November being the highest since August, Markit said.

“The disruption is expected to be short-lived, however, with many panellists anticipating a pick-up in activity as these high-value banknotes are replaced and black-market firms end their operations,” said De Lima.

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India services output shrinks in November on demonetisation woes

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