Manufacturing slides into contraction in Dec
Cash crunch takes its toll on new business orders and factory output
India’s December manufacturing output saw its biggest monthly contraction in more than eight years as cash crunch spawned by demonetisation took its toll on new business orders, according to a private survey.
The Nikkei Markit India manufacturing purchasing managers’ index (PMI) – which measures manufacturing sector activity – fell to 49.6 in December, down from 52.3 in November.
PMI below 50 indicates contraction. This is also the first shrinkage in manufacturing in a year.
“Having held its ground in November, following the unexpected withdrawal of Rs 500 and 1,000 bank notes from circulation, India’s manufacturing slid into contraction at the end of 2016,” said Pollyanna De Lima, economist at IHS 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, Lima added.
Survey participants widely blamed the withdrawal of high-value notes for the downturn as cash shortage in the economy reportedly resulted in fewer new orders.
Businesses also highlighted challenging conditions in external markets, with a fall in new businesses from abroad ending a six-month-long growth.
Though December saw a decline in manufacturing output, the average reading for October-December remained in the “growth terrain”, suggesting a positive contribution from the sector to overall gross domestic product in the third quarter of 2016-17, the survey said.
The output sub-index at 49 was its lowest this year, though the rate of contraction was only slight. The new orders sub-index which measures both foreign and domestic demand was also knocked to its weakest in 2016.
Several researchers and economists have lowered their near-term GDP growth forecasts for India in the wake of the demonetisation move, though there is a broader view that the decision would help the economy grow faster in longer run.
“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,” Lima said.
The Nikkei Markit report said the higher prices paid for a range of raw materials made average cost burden increase for the 15th straight month in December, with the rate of inflation picking up since November.
Defending the governm­ent action to pull out around 86 per cent of total cash in the circulation, RBIhad said the impact of the cash squeeze may be short-lived and it needed more time to see if the move would cause more lasting damage to economic activity.