India: Economic activity rebounds after demonetization

Activity in India’s manufacturing sector recovered from December’s one-year low in January, after the government’s demonetization hurt cash availability. The manufacturing Purchasing Managers’ Index (PMI), elaborated by Nikkei and IHS Markit, rose from December’s 49.6 to 50.4. As a result, the PMI now lies above the 50-threshold that separates expansion from contraction.

Output and new orders rose in January, fueling the overall improvement in the index. Evidence pointed to a return to normal business conditions in India, after a cash crunch had caused a downturn in the previous month. Despite the better environment, conditions in the labor market failed to improve.

Meanwhile, the Nikkei services PMI also improved in January, although it remained in contractionary territory, rising from December’s 46.8 to 48.7. The result marked the third month in contractionary territory since June 2015. According to Nikkei, sentiment among firms improved and the contraction in output moderated.

FocusEconomics Consensus Forecast panelists see fixed investment rising 0.8% in FY 2016, which is down 2.4 percentage points from last month’s estimate. For FY 2017, the panel expects fixed investment to increase 5.9%, which is down 0.5 percentage points from last month’s forecast.