Cash crunch stifles service sector again in December

NEW DELHI: The service sector contracted for the second consecutive month in December following a decline in orders due to demonetisation, a private survey showed on Wednesday. The Nikkei/Markit Services Purchasing Managers’ Index was 46.8 in December, nearly unchanged from 46.7 in November.

A reading above 50 indicates expansion and a figure below that indicates contraction. “Indian service economy ended 2016 on a grim note, with the average PMI activity index for October-December the lowest since early-2014,” said Pollyanna De Lima, economist at IHS Markit and author of the report.

Asurvey by the same firm on Monday showed a contraction in manufacturing for the first time in 2016 and the two survey reports show activity across manufacturing and services sectors — which together account for nearly 80% weightage in the economy — dipped sharpest in more than three years.

The seasonally adjusted Nikkei India Composite PMI Output Index read 47.6 in December against 49.1 in November.

Putting the two data sets together, De Lima said “a slowdown is likely” even though GDP is set to grow in the third quarter ended December 31. Economists have slashed growth estimates to below 7% while some have pencilled in sharper cuts. The Indian economy expanded 7.6% in 2015-16.

Downturn in services was broadbased, with hotels and restaurants being the worst performers. The survey blamed the government’s note ban for the deterioration in economic conditions. Rate of contraction in new projects was fastest since September 2013, implying that decline reflected shortage of money.

On the employment front, service providers made cutbacks to staffing levels in December though it was fractional. Despite Indian service providers being optimistic about the 12-month outlook for activity, their business confidence plunged to one of the lowest in the series’ 11-year history, suggesting an imminent rebound from the rupee-demonetisation downturn is unlikely.