Updated 7:35 am, Jun 17, 2019

Manufacturing Takes a Hit Amid Cash Crunch, Dec PMI Below 50 | SNE

By  The Economic Times .
Jan 03, 2017

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At 49.6, Nikkei India Manufacturing Purchasing Managers’ Index sees sharpest fall since 2008 financial crisis
India’s manufacturing contracted in December 2016 as cash crunch due to demonetisation hurt demand as well as output in the first month of ban on old high denomination notes, a private survey showed on Monday.

The Nikkei India Manufacturing Purchasing Managers’ Index fell to 49.6 in December from November’s 52.3, marking the first contraction in the last 12 months. A reading above 50 indicates economic expansion, while a reading below 50 shows contraction.

“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 at IHS Markit and author of the report.

The decline in the index is the sharpest since November 2008, the beginning of the global financial melt down. The government on November 8 announced cancellation of `500 and `1,000 notes, withdrawing from circulation over 86% of the currency.

Due to the resultant cash crunch, output and new orders fell for first time in one year, the survey showed.

Economists have slashed their growth estimates for India to less than 7% for the current financial year following demonetisation, well below 7.6% recorded last year.

Blaming the withdrawal of high-value rupee notes November 8 onwards for the downturn, survey participants said cash shortage and lower workplace activity resulted in shedding of jobs and falling buying levels in December 2016.

Operating conditions deteriorated in both consumer and intermediate goods categories, the report said.

Businesses also highlighted challenging conditions in external markets with a fall in new business from abroad ending a six-month sequence of growth.

“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.

The Reserve Bank of India has said that the impact of demonetisation will be transient.

It had not cut interest rates in the monetary policy review last month but banks have started slashing interest rates after they raised low cost deposits following demonetisation.

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