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Cash ban hits service sector in December

The government’s decision to ban high-denomination bank notes hit the domestic services sector, Nikkei India Services Purchasing Managers’ Index data showed on Wednesday. Inflow of new business dropped to its worst level since September 2013.

The contraction in the performance of the sector was led by hotels and restaurants, which emerged as the worst performers as the disposable income of the public dried up in the aftermath of demonetization. The government imposed stringent withdrawal and exchange limits for cash after November 8, even as cash was hard to come by.

“The downturn was broad-based by sub-sector, with Hotels & Restaurants firms the worst performers,” MarkitEconomics said.

“Data implied that services activity fell in response to a solid and accelerated drop in new business during December. The rate of contraction quickened to the fastest since September 2013,” with IHS Markit “panel members widely blaming the deterioration in economic conditions on the rupee demonetization with concerns towards the speed of the recovery weighing heavily on sentiment, a press release from MarketEconomics said. Anecdotal evidence suggested that the decline reflected shortages of money in the country, the statement said.

“The seasonally adjusted headline Nikkei India Services Business Activity Index registered 46.8 in December, little-changed from November’s reading of 46.7 and indicating a further solid contraction in output. This was highlighted by the seasonally adjusted Nikkei India Composite PMI Output Index recording 47.6 in December, from 49.1 in November,” the statement said.

A figure above 50 indicates expansion, a figure below 50 indicates contraction.

Factory production and and manufacturing also took a hit, with activity across the private sector economy dipping to the greatest extent in over three years.

“Cash flow issues reportedly caused another increase in outstanding business among private sector firms, with backlogs rising for the seventh straight month (although only moderately),” the release said.


Input cost and employee cut backs also weighed on the sector.

Commenting on the data, Pollyanna De Lima, economist at IHS Markit, and author of the report, said: “The Indian service economy ended 2016 on a grim note, with the average PMI activity index reading for the Oct-Dec quarter the lowest since early-2014. Combined with the manufacturing PMI, data suggest that Indian GDP is set to grow in Q3 FY16/17, but a slowdown is likely. 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-demonetization downturn is unlikely.”

At 1054 hours, the BSE Sensex was trading at 26,660.59, up 17.35 or 0.07% from previous close.