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For the first time in 2016, the Nikkei India Manufacturing Purchasing Managers’ Index fell below the crucial threshold of 50 in December. The Index fell to 49.6 last month from 52.3 in November.
The survey said that panel members blamed the withdrawal of high-value rupee notes for the downturn, as cash shortages in the economy resulted in fewer new orders.
A reading above 50 on the PMI denotes expansion, while a reading below 50 indicates contraction.
“With the window for exchanging notes having closed at the end of December, the January data will be key in showing whether the sector will see a quick rebound,” said Pollyana De Lima, Economist at IHS Markit and author of the report, adding that cash-flow issues among firms had also led to reductions in purchasing activity and employment.
Four of the five sub-components of the PMI fell below 50. At the sector level, operating conditions deteriorated in both the consumer and intermediate goods categories. The data could fuel hopes of a rate cut by the Reserve Bank of India at its next policy review on February 8.
Banks, which are flush with funds following the demonetisation of ₹500 and ₹1,000 notes on November 8, have already begun to cut lending rates.
A number of economists and agencies have cut their GDP growth forecast for 2016-17 due to the impact of demonetisation.
However, Finance Minister Arun Jaitley had last week said that revenue collections in November and other indicators such as rabi sowing show that the economy was on track.
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