The government’s demonetisation move provoked a downturn in Indian manufacturing growth in December, the first such contraction in a year, as per key macro-economic data.
According to the Nikkei Markit India Manufacturing Purchasing Managers’ Index (PMI) — a composite indicator of manufacturing performance — the withdrawal of high-value banknotes has reportedly hit new business orders and factory output in December, with companies signalling fewer amounts of new orders, buying levels and output.
The index fell to 49.6 in December, from 52.3 in November, which marked the biggest month-on-month decline in the index since November 2008 when the global economy had slipped into a severe downturn following the financial market crash in the US.
An index reading of above 50 indicates an overall increase in economic activity, and below 50 an overall decrease.
“Having held its ground in November, following the unexpected withdrawal of Rs 500 and 1,000 bank notes from circulation, India’s manufacturing industry slid into contraction at the end of 2016,” Pollyanna De Lima, Economist at IHS Markit and author of the report said in a statement.
“Cash flow issues among firms also led to reductions in purchasing activity and employment,” she said.
De Lima elaborated that surveyed companies widely blamed the scrapping of high-value currency for the downturn.
“Cash shortage in the economy reportedly resulted in fewer levels of new orders received,” the statement said.
“Concurrently, manufacturers lowered output accordingly,” it added.
Though December saw a decline in manufacturing output, the average figure for the third quarter was above the 50 level, the report said.
“Nevertheless, the average over the October-December quarter (52.1) was broadly in line with that seen in the July-September period (52.2),” it said.
According to the survey, cash shortages and lower workplace activity resulted in job shedding and falling buying levels during December.
Higher prices paid for a range of raw materials led average cost burdens to increase for the 15th straight month in December, with the rate of inflation picking up since November.
“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,” De Lima said.