Lower business confidence in a demonetised India

By Md. Taraq Junaid

On January 4th, demonetisation claimed a fresh attack on the Indian Services sector. It provoked us to ponder over the widespread political propaganda justifying the bold and abrupt change. Business confidence slumped to the third-lowest level in its eleven-year history. This only reiterates the need for reforms in the formulation of economic policies in our country.

In December 2016, the business activity contracted for a second consecutive month following the decision in November. The Nikkei India Services Purchasing Managers’ Index (PMI), which tracks the service sector companies on a monthly basis, fell to 46.7 in November and to 46.8 in December from October’s 54.5. A reading above 50 indicates economic expansion, while a reading below 50 points indicates contraction. The PMI deals with various aspects related to inventory, production, demand and supply of products.

[su_quote cite=”Pollyanna De Lima
An economist at IHS Markit”]The Indian service economy ended 2016 on a grim note, with the average PMI activity index reading for the October-December quarter the lowest since early 2014. Cash shortages resulted in fewer new business intakes, which in turn caused a fall in activity and ended a 16-month sequence of expansion[/su_quote].

The services sector, a rapidly growing one in India | Picture Courtesy : Live Mint

When will business confidence be revived?

The Nikkei India Composite PMI Output Index, which maps both manufacturing and services sectors, stood at 47.6 in December when compared to 49.1 in November.

[su_quote cite=”Pollyanna De Lima”]Combined with the manufacturing PMI, data suggest that Indian GDP is set to grow in Q3 2016-17. The disruption is expected to be short-lived; with many panellists anticipating a pick-up in business activity as these high-value banknotes are replaced and black-market firms end their operations.[/su_quote]

Although an improvement in the level of business activity is expected over the next few months, it is extremely hard to predict.

Featured Image Source : Huffington Post
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