6.12.16

Demonetisation Blues: Service Sector falls


Activity in India's key services sector contracted for the first time since June 2015 as the cash crunch due to government's early November decision to scrap some high value notes hit demand.
Dropping from 54.5 to 46.7 in November, the Nikkei India services business activity index pointed to the sharpest reduction in output for al most three years. The 50-point mark separates expansion from contraction. The survey is based on data compiled from monthly replies to questionnaires sent to purchasing executives in about 350 private service sector companies.
The latest data comes close on the heels of the manufacturing sector PMI (purchasing mangers' index) which showed growth slowed sharply in November on the back of the cash shortage.
Economists have said the impact of demonetisation is expected to hurt economic growth significantly in the current fiscal and some have predicted it could slip below the 7% mark. The government expects some disruption to the economy due to the note ban in the next two quarters and predicts a sharp rebound after that.
The survey showed new business declined for the first time since June 2015, leading to a reduction in activity. Correspondingly, back logs of work rose, while employment increased only marginally . In spite of the falls in output and new orders, optimism regarding future activity improved. Input costs were broadly unchanged, whereas prices charged decreased slightly.
Anecdotal evidence highlighted a lack of cash in the economy . Activity decreased in three of the six sub-sectors such as financial intermediation, hotels, restaurants, renting and business activities, the survey showed.
Although the scarcity of rupee notes also weighed on manufacturing performance, new order growth was sustained. The rise was, however, insufficient to offset the downturn in services and new business across the private sector as a whole decreased slightly .
Service providers recorded higher levels of outstanding business in November, which they commonly associated with delayed payments from clients. Backlogs rose for the sixth straight month, but at the slowest rate since July . Similarly , unfinished work at manufacturers increased at a softer pace.
The anticipated replacement of high-value rupee notes, improved advertising campaigns, favourable government policies and the withdrawal of unregulated companies from the market all boosted sentiment during the latest survey period.



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