India’s services sector contracted in November — the first in 17 months and the steepest in over three years — as it was “heavily impacted” by the sudden demonetisation exercise and the consequent cash shortage, according to a survey.
This development comes ahead of the December 7, 2016 policy review by the Monetary Policy Committee, headed by RBI Governor Urjit Patel, and amid demands from the industry for a further rate cut to revive the economy. The panel had reduced the benchmark interest rates by 0.25 per cent to 6.25 per cent in October.
The seasonally adjusted headline Nikkei India Services Business Activity Index dropped from 54.5 to 46.7 in November 2016, Nikkei-IHS Markit said in a statement. The intellectual property rights to the Nikkei India Services and Composite PMI (Purchasing Managers’ Index) are owned by or licensed to IHS Markit. The Nikkei India Services PMI is based on data compiled from monthly replies to questionnaires sent to purchasing executives in around 350 private service sector companies, it said, adding that an index reading above 50 indicates an overall increase in that variable, below 50 an overall decrease.
Pollyanna De Lima, economist at IHS Markit, and author of the report, said: “...Companies were heavily impacted by the 500 and 1,000 rupee notes ban. Cash shortages resulted in fewer new business intakes, which in turn caused a fall in activity.” She added: “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. In fact, business confidence improved to a three-month high.”
Ms. De Lima said on a positive note, the reduction in money supply curbed inflation in November 2016, adding that input costs facing service providers were broadly unchanged, which encouraged firms to lower their selling prices. She said: “In light of these numbers, further cuts to the benchmark rate are expected.”
According to the survey, anecdotal evidence highlighted a lack of cash in the economy. Activity decreased in three of the six monitored sub-sectors — financial intermediation, hotels & restaurants and renting and business activities. Factory production rose further during the month, but the rate of growth eased, Nikkei-IHS Markit said. Concurrently, the seasonally adjusted Nikkei India Composite PMI Output Index dipped from October’s 45-month high of 55.4 to 49.1 in November 2016, thereby pointing to a slight contraction in private sector activity overall, it added.
