Demonetisation hits manufacturing sector

Nikkei India Manufacturing PMI fell to 49.6 in December

Companies also faced tough conditions in external markets, with new business from abroad falling.

Demonetisation of high-value currency notes in November has begun to hit the manufacturing sector, according to a private sector survey.

The Nikkei India Manufacturing Purchasing Managers’ Index (PMI) fell to 49.6 in December, the first time it hit below the 50-mark in 2016, from 52.3 in November. A reading below 50 implies contraction while one above 50 indicates expansion.

“PMI data for December indicated that the rupee demonetisation took a toll on manufacturing performance,” the report by Nikkei said. “Companies saw new work and output dip for the first time in 2016. In turn, quantities of purchases were scaled back and employment lowered. Meanwhile, input costs increased at a quicker rate, whereas output charge inflation eased.”

“Having held its ground in November following the unexpected withdrawal of ₹500 and ₹1,000 bank notes from circulation, India’s manufacturing industry slid into contraction at the end of 2016,” said Pollyanna De Lima, Economist,HIS Markit and author of the report. “Shortages of money in the economy steered output and new orders in the wrong direction, thereby interrupting a continuous sequence of growth that had been seen throughout 2016.”

“Cash flow issues among firms also led to reductions in purchasing activity and employment,” Ms De Lima added.

The respondents said that the withdrawal of high-value rupee notes caused the downturn in December since shortage of cash had resulted in a lower number of new orders.

“Rates of contraction in new work and production were marginal overall, but in both cases the reductions were the first in 2016,” the report added. “Businesses also highlighted challenging conditions in external markets, with a fall in new business from abroad ending a six-month sequence of growth.”

Order backlogs rose for the seventh consecutive month but at the slowest rate in this sequence, according to the report.

“As the survey showed only a mild decline in manufacturing production in the last month of the year, the average reading for the October-December quarter remained in growth terrain, thereby suggesting a positive contribution from the sector to overall GDP in Q3 FY17,” Ms. De Lima said. “With the window for exchanging notes having closed at the end of December, January data will be key in showing whether the sector will see a quick rebound.”