Cash crunch pulls Services sector to contraction abyss

Hit hard by demonetisation, the services sector slipped into contraction in November worst slump in nearly three years -- as new orders dried up and customers cut spending due to cash shortages, putting pressure on RBI to keep rates low, a monthly survey showed on Monday.

The Nikkei India Services Purchasing Managers’ Index (PMI), which tracks services sector companies on a monthly basis, stood at 46.7 in November, down from 54.5 in October.

The Index slipped into contraction territory for the first time since June 2015 and pointed to the sharpest reduction in output for almost three years.

A reading above 50 means the sector is expanding, while a score below this mark signals contraction.

Due to cash crunch in the economy post demonetisation, businesses declined in financial intermediation, hotels & restaurants and renting activities.

“The latest set of gloomy PMI figures for the Indian service sector shows that companies were heavily impacted by the ban on Rs 500 and 1,000 notes. The cash shortage resulted in fewer new business intakes, which in turn caused a fall in activity and ended a 16-month sequence of expansion,” said Pollyanna De Lima, IHS Markit economist and author of the report.

The Nikkei India Composite PMI Output Index also dropped to 49.1 in November from October’s 45-month high of 55.4, pointing to a contraction in entire the private sector activity, including the manufacturing sector.

“The drop in services activity is not surprising since the share of the unorganised sector in services (around 45 per cent of total, as per 2004-05 data) is much higher than in manufacturing (around 23 per cent), suggesting larger dependence on cash transactions,” said Nomura, Japanese financial services major, in a research note.

Lima further said the disruption in business activity 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,” he said.

Expectations of replacement of high-value rupee notes, improved advertising campaigns, favourable government policies and the withdrawal of unregulated companies from the market have boosted sentiment for the coming 12 months, the survey noted.

On the prices front, the reduction in money supply kept inflation in check in November. Input costs facing service providers were broadly unchanged, which in turn encouraged firms to lower their selling prices.

“In light of these numbers, further cuts to the benchmark rate are expected,” Lima said.

The Monetary Policy Committee, headed by RBI Governor Urjit Patel, in October cut benchmark interest rates by 0.25 per cent to 6.25 per cent. The next RBI policy review is on December 7.

The RBI on Monday told the Delhi High Court that the cap on free-of-charge withdrawals from ATMs by banking customers was a “policy decision” and the court should not interfere in it.

The Reserve Bank of India (RBI) counsel also raised the issue of “maintainability” of the petition which has sought directions to allow banking customers to make unlimited number of transactions free of any charges on their own bank ATMs.

“It is a policy decision. Why should the court interfere in it? They (petitioner) are challenging the circular of the RBI. I am challenging the maintainability of this plea,” the RBI counsel told a bench of Chief Justice G Rohini and Justice Sangita Dhingra Sehgal.

The bench, however, said it would hear the matter on April 12 next year as the main counsel for the petitioner, advocate Swati Aggarwal, was not available  on Monday.