Mumbai: The growth in India’s manufacturing sector contracted in December 2016 as severe cash crunch in the economy led to a sharp dip in new work orders and output.
The seasonally adjusted Nikkei India Manufacturing Purchasing Managers Index (PMI) fell below the crucial 50 level mark in December to 49.6, the first time in 2016.
A reading above 50 indicates expansion while a reading below 50 suggests contraction in activities.
This is also the biggest month-on-month decline since November 2008 when the global financial markets experienced heightened risk aversion after the US financial services firm Lehman Brothers filed for bankruptcy.
Manufacturing firms, which participated in the survey widely blamed the withdrawal of high-value rupee notes for the downturn, as cash shortages in the economy reportedly resulted in fewer levels of new orders received.
While the rate of reduction in both new orders and production were marginal, this was the first drop in 2016.
Businesses also highlighted challenging conditions in the external markets, with a fall in new business orders from abroad that ended a six-month sequence of growth.
After the Modi-led government scrapped high value currency notes in November, many economists including the former Prime Minister Dr Manmohan Singh had warned about a slowdown in domestic economic growth in coming months.
“Shortages of money in the economy steered output and new orders in the wrong direction, thereby interrupting a continuous sequence of growth that had been seen throughout 2016.
“Cash flow issues among firms also led to reduction in purchasing activity and employment. With the window for exchanging notes having closed at the end of December, January data will be key in showing whether the sector will see a quick rebound,” said Pollyanna De Lima, author of the report.
The survey highlighted that both pre- and post-production stocks decreased during December.
The former saw the first monthly drop in 13 months, while inventories of finished goods declined for the 18th month.
Finally, cash flow issues reportedly impaired the manufacturers’ ability to work on outstanding business. Backlogs rose for the seventh consecutive month, the survey said.
