Rupee ban leads to sharpest fall in services new business since September 2013
Business activity in the Indian service sector fell for the second consecutive month in December 2016, reflecting a steeper reduction in incoming new work. Backlogs continued to rise, while employment decreased fractionally. 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. Meanwhile, input costs rose further, but efforts to boost demand led some firms to lower their charges.The seasonally adjusted headline Nikkei India Services Business Activity Index registered 46.8 in December, little-changed from November's reading of 46.7 and indicating a further solid contraction in output. Moreover, the downturn was broad-based by sub-sector, with Hotels & Restaurants firms the worst performers.
With factory production also falling, activity across the private sector economy as a whole dipped to the greatest extent in over three years. This was highlighted by the seasonally adjusted Nikkei India Composite PMI Output Index recording 47.6 in December, from 49.1 in November.
Data implied that services activity fell in response to a solid and accelerated drop in new business during December. The rate of contraction in new work quickened to the fastest since September 2013, with anecdotal evidence suggesting that the decline reflected shortages of money in the country. Meanwhile, order books at manufacturers decreased for the first time in 2016, albeit marginally.
Cash flow issues reportedly caused another increase in outstanding business among private sector firms, with backlogs rising for the seventh straight month (although only moderately).
In spite of higher backlogs, service providers made cutbacks to staffing levels during December. That said, the drop in employment was only fractional, thereby continuing a trend of broadly stagnant workforces that was evident throughout 2016. A similar trend of fractional job losses was seen among goods producers.
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Input prices faced by service providers in India continued to rise in December. However, with less than 1% of firms indicating higher cost burdens and the remaining respondents signalling no change since November, the rate of cost inflation was only marginal and negligible in the context of historical data. Purchase price inflation at manufacturers picked up, but remained below the series long-run average.
Services charges were lowered for the third successive month amid intense competitive pressures and attempts to stimulate demand. Nevertheless, the rate of discounting was marginal overall. Conversely, goods producers raised their output prices for the tenth straight month, but the rate of inflation eased to the weakest since August.
Indian service providers signalled optimism regarding the 12-month outlook for activity during December, although the level of positive sentiment dipped to the third-lowest in over 11 years of data collection. Evidence highlighted expectations of a rebound in demand in the coming 12 months, but worries towards the speed of the recovery following the rupee demonetization hampered confidence.
Commenting on the Indian Services PMI survey data, Pollyanna De Lima, economist at IHS Markit, and author of the report, said "The Indian service economy ended 2016 on a grim note, with the average PMI activity index reading for the Oct-Dec quarter the lowest since early-2014. Combined with the manufacturing PMI, data suggest that Indian GDP is set to grow in Q3 FY16/17, but a slowdown is likely. Of concern, business confidence among service providers plunged to one of the lowest in the series 11-year history, suggesting that an imminent rebound from the rupee-demonetization downturn is unlikely."
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