PMI Plunge Adds to Evidence India Cash Ban Is Hurting Growth

  • Services to contract for second month; composite plummets
  • Government to announce FY17 growth estimate on Friday

Indians Said to Deposit 97% of Banned Rupees

India’s dominant services sector is set to contract for a second straight month, adding to evidence that Prime Minister Narendra Modi’s surprise ban on cash will trigger a sharp slowdown in Asia’s No. 3 economy.

The Nikkei India Services Purchasing Managers’ Index was at 46.8 in December, a report showed on Wednesday, little changed from 46.7 a month earlier. A number below 50 indicates a contraction. The data follows a similar survey Monday, which showed the manufacturing sector will shrink for the first time in a year, dragging down the composite PMI to 47.6, the lowest since at least 2013.

The PMI data sets the tone for the government’s first growth estimate for the year through March, due Friday. Private economists have slashed forecasts for October-December, and a continued slowdown will strip India of its position as one of the world’s fastest-growing major economies and risk a political backlash against Modi.

"Panel members widely blamed the deterioration in economic conditions on the rupee demonetization, with concerns towards the speed of the recovery weighing heavily on sentiment," economist Pollyanna De Lima wrote in the IHS Markit report. "Meanwhile, input costs rose further, but efforts to boost demand led some firms to lower their charges."

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 downturn in the services sector was broad-based, with hotels and restaurants the worst performers
  • The rate of contraction in new orders quickened to the fastest pace since September 2013
  • Business confidence among service providers slid to its third-lowest in the survey’s 11-year history
  • Service charges were lowered for the third successive month amid intense competitive pressures and attempts to stimulate demand

"Looking ahead, the currency shortage will continue to hamper activity in the early part of 2017," Shilan Shah, India economist at Capital Economics wrote in a note, adding that growth will slowly recover as India moves to a less cash dependent society and possible interest rate cuts bolster activity.

The benchmark stock index ended little changed in Mumbai on Wednesday, while the rupee strengthened 0.4 percent to 68.0450 a dollar. Bonds rose, pushing the yield on the note due September 2026 to 6.36 percent from 6.44 percent, building on recent gains after the government cut its borrowing target for the rest of the year.

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