India: Manufacturing activity falls in December amid demonetization

Activity in India’s manufacturing sector sunk to a one-year low in December, as the government’s demonetization hurt cash availability. The manufacturing Purchasing Managers’ Index (PMI), elaborated by Nikkei and IHS Markit, fell from November’s 52.3 to 49.6. As a result, the PMI now lies below the 50-threshold that separates contraction from expansion.

Output and new orders recorded declines for the first time in one year, driving the fall in manufacturing output. Firms blamed the recent cash crunch for taking a toll on business activity. The downturn in the sector resulted in employment dropping and buying levels falling in the month. Meanwhile, price pressures rose. IHS Markit analysts commented on the outlook going forward, stating that, “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.”

Meanwhile, the services PMI was broadly stable, seeing a small uptick from the previous month. The Nikkei services PMI rose from November’s 46.7 to 46.8 in December. The result was below the 50-threshold and marked the second month in contractionary territory since June 2015. According to Nikkei, the rupee demonetization caused a drop in new work and business confidence slid to the third lowest level in history, keeping the sector in contractionary territory.

FocusEconomics Consensus Forecast panelists see fixed investment rising 3.2% in FY 2016, which is unchanged from last month’s estimate. For FY 2017, the panel expects fixed investment to increase 6.4%.