PMI plunge adds to evidence India cash ban is hurting growth

Indian people line up outside the Reserve Bank of India (RBI) to deposit old Indian rupee notes, in Bangalore, India on Dec 30, 2016.
Indian people line up outside the Reserve Bank of India (RBI) to deposit old Indian rupee notes, in Bangalore, India on Dec 30, 2016.PHOTO: EPA

MUMBAI (BLOOMBERG) - India's dominant services sector is set to contract for a second straight month, adding to evidence that Prime Minister Narendra Modi's surprise ban on cash will trigger a sharp slowdown in Asia's No 3 economy.

The Nikkei India Services Purchasing Managers' Index was at 46.8 in December, a report showed on Wednesday (Jan 4), little changed from 46.7 a month earlier. A number below 50 indicates a contraction. The data follows a similar survey Monday, which showed the manufacturing sector will shrink for the first time in a year, dragging down the composite PMI to 47.6, the lowest since at least 2013.

The PMI data sets the tone for the government's first growth estimate for the year through March, due on Friday. Private economists have slashed forecasts for October-December, and a continued slowdown will strip India of its position as one of the world's fastest-growing major economies and risk a political backlash against Modi.

"Panel members widely blamed the deterioration in economic conditions on the rupee demonetization, with concerns towards the speed of the recovery weighing heavily on sentiment," economist Pollyanna De Lima wrote in the IHS Markit report. "Meanwhile, input costs rose further, but efforts to boost demand led some firms to lower their charges."

India's economy will grow 6.9 per cent in the year through March, according to the median estimate in a Bloomberg survey published late last month. That's slower than the 7.3 per cent predicted by a survey in November and the previous year's 7.6 per cent actual expansion.