Post Demonetisation, India's Services Contracts for First Time in 17 Months

New Delhi: India’s services sector, accounting for nearly 60 percent of the economy, contracted in November for the first time in one and a half years as a result of cash shortages after demonetisation, even as Prime Minister Narendra Modi on Monday said that the economy is poised to grow five-fold by 2040.

The India services business activity index registered 46.7 in November, from 54.5 in October, providing further leads of how the cash crunch is affecting the economy. An index reading above 50 indicates an expansion and one below that number indicates contraction.

The last such contraction occurred in June 2015, when contraction in activity and new businesses led to the decline.

The survey, which is compiled and released every month by London-based IHS Markit, backlogs of work rose while employment increased only marginally. Although the services sector has registered the sharpest reduction in output for three years, optimism regarding future activity improved.

Modi, in an address to the Petrotech Exhibition, said, "While global economy goes through uncertainty, India has shown tremendous resilience. FDI is also at the highest level. We expect growth in manufacturing, transport, civil aviation among other sectors"

That would account for the optimism in the services and industrial sectors despite demonetisation. Indian service providers expect activity to rise over the next one year, with the degree of optimism 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, between November 11-28.

“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,” Pollyanna De Lima, an economist with IHS Markit said.

“The disruption is expected to be short-lived with many panelists 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,” she added.

The India Services PMI is based on data compiled from replies to a monthly questionnaire sent to executives in around 350 private service sector companies.