Photographer: Prashanth Vishwanathan/Bloomberg

New Sales Tax Roils India With PMI Plunging Most Since 2009

  • Index measuring key services sector drops to lowest since 2013
  • Employment decreased though overall number is "slight"

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Business conditions in India have deteriorated the most since the global financial crisis as the roll out of a nationwide sales tax disrupted supply and distribution links just months after Prime Minister Narendra Modi’s cash ban roiled markets.

The Nikkei India Composite PMI Output Index fell to 46 in July from 52.7 in June, the steepest drop since March 2009, a report showed Thursday. Activity in the key services sector plunged to 45.9 from from 53.1 -- the lowest since September 2013 -- after data showed manufacturing slumped the most since 2009. A reading below 50 indicates contraction.

"Private sector activity dipped for the first time since the demonetization shock" and "most of the contraction was attributed to the implementation of the goods and services tax and the confusion it caused," Pollyanna De Lima, principal economist at IHS Markit, said in the report. "Faced with fewer workloads, service providers and manufacturers lowered payroll numbers in July."

The data add to evidence of underlying weakness in one of the world’s fastest-growing economies. The central bank on Wednesday cut rates to the lowest since 2010 and urged the government to speed up projects because there’s "an urgent need" to boost private investment.

Read: Patel Placates With Rate Cut, Focus on Modi Investment Push

However, rates of job shedding -- while the fastest since early 2009 -- were "slight overall," according to the report. Firms seem convinced that prospects will brighten as the GST regime becomes clearer, De Lima said.

Business activity will probably "normalize" after August and PMIs will rebound, said Sonal Varma, an economist with Nomura Holdings Inc. in Singapore. "Data also suggests some upside risk to services inflation in the coming months due to the higher tax burden," she said.

Key findings from the services sector:

  • About 23 percent of survey participants reported lower output
  • Four of five broad areas contracted, except for finance and insurance
  • Outstanding business rose reflecting difficulties in obtaining payments
  • Employment fell the most in eight-and-a-half years, halting a four-month streak of job creation
  • Prices charged rose at the quickest pace since 2013

The PMIs follow a clutch of survey results published by the central bank on Wednesday, which offer a grim picture of the $2 trillion economy. Indian factories were running at about 74 percent of capacity from October through December, business sentiment in Indian manufacturing worsened in the second quarter of the calendar year and consumer confidence dipped into the "pessimistic zone" in June.

Meanwhile the budget deficit is at 81 percent of the full-year target in the first six months, compared with 61 percent a year earlier, constraining the government’s ability to spend more.

Investors now await official June factory output data due Aug. 11, July inflation scheduled for Aug. 14 and April-June GDP numbers due Aug. 31. At the end of the month, the government will also share federal finances during July, the first indicator of how the GST is affecting tax revenue. Also this month the Reserve Bank of India typically announces its dividend payout to the government and the annual report, which could offer an estimate of gains or losses from the cash clampdown.

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