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Bearing the brunt of the demonetisation drive, service sector activity ended a 16-month sequence of expansion and dipped in November, according to a private survey.
With a contraction in new business inflows and output in private firms, the Nikkei India Services Business Activity Index dipped to 46.7 in November. This is below the level of 50 on the index and denotes contraction in production. The Index had risen to 54.5 in October. This is the first time since June 2015 that the index has gone below the 50-mark.
“Anecdotal evidence highlighted a lack of cash in the economy,” said Nikkei in a release on Monday, adding that three of the six sub sectors monitored — financial intermediation, hotels and restaurants and renting and business activities showed a decrease in activity.
The data comes days ahead of the policy review by the Monetary Policy Committee on Tuesday and Wednesday, when it is widely expected to lower interest rates.
While banks are faced with surplus liquidity, economic growth is expected to slow down in the short term due to the currency squeeze.
Private sector activity The Nikkei India Composite PMI Output Index also dipped to 49.1 in November from the 45- month high in October and pointed to a slight contraction in overall private sector activity.
“The latest set of gloomy PMI figures for the Indian service sector shows that companies were heavily impacted by the ₹500 and ₹1,000 notes ban. Cash shortages resulted in fewer new business intakes, which in turn caused a fall in activity and ended a 16-month sequence of expansion,” said Pollyanna De Lima, economist at IHS Markit and author of the report.
She however, said that disruption is likely to be short lived and business confidence has improved to a three-month high.
Further, the reduction in money supply also eased inflation in November. “In light of these numbers, further cuts to the benchmark rate are expected,” De Lima said, noting that input costs remained unchanged for service providers and retail prices were lowered.
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