India’s factory activity continued to expand in November, albeit at a slower pace, amid withdrawal of high-value bank notes in India as cash crunch slowed down domestic consumption, production of goods and new orders.
According to a Markit Economics report, Nikkei India Manufacturing Purchasing Managers’ Index, a gauge measuring activity in the manufacturing sector declined to 52.3 in November from October’s 22-month high of 54.4, with a reading above 50 signaling expansion.
Prime Minister Narendra Modi’s government decision to demonetize Rs 500 and Rs 1000 banknotes reportedly hampered manufacturing growth in the month, with companies signalling softer increases in order books, buying levels and output.
While it’s hard not to oversee the short-term repercussions of scraping higher value currency notes which comprise 86 per cent of total value of currency in circulation, the long-term implications of demonetization are seen as positive. The move is expected to bring in new growth capital that would help the government to provide a small business loan designed to cater to micro enterprises.
According to the report, weaker growth in new business inflows was one factor leading to the downward movement in the PMI. Order books were up at a moderate rate, the slowest pace since July. However, higher demand from domestic as well as external clients were recorded, but indicated that growth was hampered by the money crisis. The rise in new export orders also lost some momentum in November.
Growth in manufacturing production also slowed amidst reports of cash shortages. Weaker increases in output were recorded in each of the three monitored sectors, with consumer goods producers registering a sharp decline in growth. Slowing demand in the world’s fastest growing major economy could undermine growth in coming quarters especially as factories have already started cutting output.
On the prices front, the report said that though there was an overall increase in input costs, the rate of inflation eased since October, providing room for the Reserve Bank of India to cut interest rates further. Indian consumer inflation eased for a third straight month in October to 4.2 per cent, helped by smaller rises in food prices.