Slowdown due to demonetisation: PMI services shrinks in November after 17 months

Nomura forecasts slowdown in GDP growth to 6.5% in December quarter

The services sector contracted for the first time in 18 months in November, indicating economic slowdown due to demonetisation.

The Nikkei Services Purchasing Managers' Index (PMI) fell to 46.7 in November from 54.5 in the previous month, the sharpest reduction in three years. A reading above 50 indicates growth and a reading below shows contraction. This may be an early indicator of deceleration of the gross domestic product (GDP) in the December quarter. 

“The latest set of PMI figures for the Indian services sector shows companies were heavily impacted by the note ban. Cash shortages resulted in fewer new business intakes, which, in turn, caused a fall in activity and ended a 16-month sequence of expansion,” said Pollyanna de Lima, economist at IHS Markit.
 

Japanese financial firm Nomura on Monday said India’s GDP growth rate would likely fall to 6.5 per cent in the third quarter and stay subdued at 7 per cent in the subsequent three months with the cash shortage expected to continue till next month. Once the cash shortage eased, a gradual recovery was likely to take hold in the second half of 2017 from a boost to government finances and improved liquidity in the banking system, Nomura said in a research note.

Finance ministry sources are of the view that growth in the third quarter could slide to 5.6 per cent from 7.3 per cent in the previous quarter.

Former Prime Minister Manmohan Singh said in Parliament last month demonetisation would hurt agriculture and small industry and could cause a 2 per cent decline in the GDP. West Bengal Finance Minister Amit Mitra said in New Delhi on Saturday the GDP might contract in the third quarter.

Data released by the Central Statistics Office (CSO) last week showed the economy grew 7.2 per cent in the first half of 2016-17, led by consumption as investment remained muted. With demand affected, the monetary policy committee (MPC) chaired by Reserve Bank of India Governor Urjit Patel may be forced to cut the repo rate at a meeting on Wednesday. The MPC had during its last policy meeting in October reduced the repo rate by a quarter of a percentage point to 6.25 per cent.

The PMI report pointed out the reduction in money supply in November curbed inflation. “Input costs faced by service providers were broadly unchanged, which encouraged firms to lower their selling prices. In light of these numbers, further cuts in the benchmark interest rate are expected,” said de Lima.

The PMI report said the drop in services activity was not surprising since the share of the unorganised sector in services at 45 per cent of the total, according to data for 2004-05, was much higher than the 23 per cent in manufacturing, suggesting a larger dependence on cash transactions.

The construction, trade, hotels and real estate industries had a higher unorganised component and were more vulnerable to the cash shortage, it said.