Statsguru: Economic activity falters after demonetisation

Leading indicators suggest economic activity has been disrupted after demonetisation. 

As Chart 1 shows, vehicles sales plummeted in December. This decline was driven largely by a fall in sales of two-and three-wheelers and medium and heavy commercial vehicles. 

Surprisingly though, sales of passenger vehicles contracted by a mere 1.3 per cent in December, suggesting that perhaps urban demand may have remained resilient in the face of demonetisation.

Bank credit to industry slowed sharply after demonetisation as shown in Chart 2. This suggests that corporate credit demand, a function of both capacity utilisation and domestic demand, continues to remain low. 

Nikkei’s purchasing managers index (PMI) also points to a sharp slowdown in economic activity. As Chart 3 shows, both manufacturing and services PMI fell below 50, indicating contraction.

And Chart 4 shows indirect tax revenues slowed in November and December. But it is interesting to note that despite tax growth slowing, the numbers don’t seem to indicate as severe a disruption as some had expected.

While the ongoing results season will provide an indication of how much companies’ top line has been hit, margins are likely to have been hit as wholesale prices have edged upwards, as seen in Chart 5.

But the index of industrial production (IIP) suggests a different story. The IIP edged upwards in November, with capital goods growing after months of contraction. Perhaps the first real estimate of the extent of pain will be when the Ministry of Statistics and Programme Implementation publishes the third-quarter gross domestic product estimates on February 28.