Services activity declines as cash shortages hit the sector
The performance of India's service sector weakened in November as a result of cash shortages. New business declined for the first time since June 2015, leading to a solid reduction in activity. Correspondingly, backlogs of work rose, while employment increased only marginally. In spite of the falls in output and new orders, optimism regarding future activity improved. Input costs were broadly unchanged, whereas prices charged decreased slightly.Dropping from 54.5 to 46.7 in November, the seasonally adjusted headline Nikkei India Services Business Activity Index registered in contraction territory for the first time since June 2015 and pointed to the sharpest reduction in output for almost three years. Anecdotal evidence highlighted a lack of cash in the economy. Activity decreased in three of the six monitored sub-sectors, namely Financial Intermediation, Hotels & Restaurants and Renting & Business Activities.
Factory production rose further during the month, but the rate of growth eased. Concurrently, the seasonally adjusted Nikkei India Composite PMI Output Index dipped from October's 45-month high of 55.4 to 49.1 in November, thereby pointing to a slight contraction in private sector activity overall.
As was the case for activity, new business inflows at services firms declined during November. The fall in new work was the first in 17 months and the steepest in over three years. Panellists indicated that cash shortages restricted client bookings. Although the scarcity of rupee notes also weighed on manufacturing performance, new order growth was sustained. The rise was, however, insufficient to offset the downturn in services and new business across the private sector as a whole decreased slightly.
Service providers recorded higher levels of outstanding business in November, which they commonly associated with delayed payments from clients. Backlogs rose for the sixth straight month, but at the slowest rate since July. Similarly, unfinished work at manufacturers increased at a softer pace.
Ongoing capacity pressures translated into job creation across the service sector in November. However, the pace of increase in staffing levels was only marginal. By comparison, manufacturing jobs were little-changed as indicated by the respective index posting only fractionally above 50.0.
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Indian service providers expect activity to rise over the next 12 months, with the degree of optimism signalled in November being the highest since August. The anticipated replacement of high-value rupee notes, improved advertising campaigns, favourable government policies and the withdrawal of unregulated companies from the market all boosted sentiment during the latest survey period.
Input costs in the Indian service sector were broadly unchanged in November as falling prices for petrol and raw materials acted to offset higher staff salaries. The respective index dropped to a three-month low and was close to the crucial threshold of 50.0. Purchase prices in the manufacturing industry rose again, albeit the rate of inflation eased from October's 26-month high. Across the private sector as a whole, input cost inflation softened to the weakest since August.
Efforts to secure new work and relatively stable costs encouraged services companies to lower their selling prices in November. That said, output charges fell only slightly. Average selling prices across the private sector were broadly unchanged.
Commenting on the Indian Services PMI survey data, Pollyanna De Lima, economist at IHS Markit, and author of the report, said: "The latest set of gloomy PMI figures for the Indian service sector shows that companies were heavily impacted by the 500 and 1,000 rupee 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.
"The disruption is expected to be short-lived, however, with many panellists anticipating a pick-up in activity as these high-value banknotes are replaced and black-market firms end their operations. In fact, business confidence improved to a three-month high.
"On a positive note, the reduction in money supply curbed inflation in November. Input costs facing service providers were broadly unchanged, which encouraged firms to lower their selling prices. In light of these numbers, further cuts to the benchmark rate are expected."
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