Talking Point: Demonetisation hits December services growth

Indian service providers continued to be impacted by the November 8 move with the Nikkei Services Purchasing Managers’ Index (PMI) stuck almost unchanged at 46.8 in December as compared to the 46.7 in November. An index reading of above 50 indicates an overall increase, while below 50 an overall decrease. The PMI series of data are published by the leading global diversified provider of financial information services “IHS Markit”.

“Business activity in the service sector fell for the second consecutive month in December, reflecting a steeper reduction in incoming new work. Backlogs continued to rise, while employment decreased fractionally,” the survey said. “Panel members widely blamed the deterioration in economic conditions on the rupee demonetisation, with concerns towards the speed of the recovery weighing heavily on sentiment,” it said. 

“The Indian service economy ended 2016 on a grim note, with the average PMI activity index reading for the October-December quarter the lowest since early 2014,” said Pollyanna De Lima, economist at IHS Markit and author of the report. According to the report, services activity fell in response to a solid and accelerated drop in new business during December. 

The rate of contraction in new work quickened to the fastest since September 2013, with evidence suggesting the decline reflected shortages of money in the country. Order books at manufacturers decreased in December for the first time in 2016, it said. With factory production also falling, activity across the private sector economy as a whole dipped to the greatest extent in over three years, De Lima said. 

“This was highlighted by the seasonally adjusted Nikkei India Composite PMI Output Index (manufacturing and services) recording 47.6 in December, from 49.1 in November,” she said. “Of concern, business confidence among service providers plunged to one of the lowest in the series’ 11-year history, suggesting that an imminent rebound from the rupee demonetisation downturn is unlikely,” she said. Business confidence is being hampered by worries about the speed of the recovery following the rupee demonetisation, the Nikkei survey found.