India’s Manufacturing to Shrink as Cash Shortages Cut Demand

  • Nikkei December PMI indicates first contraction since 2015
  • ‘January data will be key’ to assess ability to rebound

A private gauge indicates that India’s manufacturing sector will shrink for the first time in a year as Prime Minister Narendra Modi’s unprecedented clampdown on cash hurts demand.

The Nikkei India Manufacturing Purchasing Managers’ Index was at 49.6 in December, a report showed on Monday, the lowest since December 2015. A number below 50 indicates a contraction.

"Shortages of money in the economy steered output and new orders in the wrong direction, thereby interrupting a continuous sequence of growth that had been seen throughout 2016," economist Pollyanna De Lima wrote in the report. "Cash flow issues among firms also led to reductions in purchasing activity and employment."

A continued slowdown will strip India of its position as one of the world’s fastest-growing big economies and risk a political backlash against Modi. PMI data is due from India’s key services sector on Wednesday before focus shifts to the government’s first official growth estimate for the year through March.

  • New work and production fell slightly but recorded the first decrease in a year
  • Payrolls decreased marginally; vast majority of panelists signaled unchanged workforces
  • Input cost inflation accelerated
  • "January data will be key in showing whether the sector will see a quick rebound," De Lima said.

Other recent data also mirror the stress. Motorcycle maker Bajaj Auto Ltd.’s total sales slipped 22 percent in December, the steepest fall in at least 21 months. Motorcycle sales -- a key indicator of rural demand -- declined 18 percent. India’s biggest automaker by volume, Maruti Suzuki Ltd., reported a 4.4 percent drop in domestic December sales, the first decline in six months, while overall sales fell 1 percent from a year earlier.

India’s economy will grow 6.9 percent in the year through March, according to the median estimate in a Bloomberg survey published late last month. That’s slower than the 7.3 percent predicted by a survey in November and the previous year’s 7.6 percent actual expansion.

The benchmark stock index fell 0.1 percent in Mumbai on Monday and the rupee weakened 0.4 percent to 68.2275 a dollar. Bonds rose after the nation’s largest lender slashed interest rates, pushing the yield on the sovereign note due September 2026 to 6.4 percent from 6.51 percent.

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