Services sector contracts for 2nd month on cash crunch: PMI

Reeling under cash crunch, services sector contracted for the second consecutive month in December as the demonetisation move took a heavy toll on business activities and led to the sharpest fall of over three years in new orders, a monthly survey showed on Wednesday.

The Purchasing Managers’ Index (PMI) survey further showed that the business confidence slumped to the third- lowest level in its 11-year history, while suggesting that any imminent recovery was unlikely from the demonetisation- triggered downturn.

The Nikkei India Services PMI, which tracks services sector companies on a monthly basis, stood at 46.8 in December, largely unchanged from November’s 46.7 reading.

A reading above 50 shows expansion while a score below this level denotes contraction. The index had slipped into the contraction territory in November and remained in that zone in December as the demonetisation move, involving scrapping of high-value old currency notes, led to the sharpest fall in new business since September 2013.

This follows another PMI dataset released on Monday that showed that the manufacturing sector also contracted in December its first shrinkage in a year, which together suggested towards a slowdown in the overall GDP growth rate.

“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,” said Pollyanna De Lima, economist at IHS Markit and author of the report. 

With factory production also softening, activity across the private sector saw the biggest drop in over three years. 

The seasonally adjusted Nikkei India Composite PMI Output Index -- which maps both manufacturing and services sectors –stood at 47.6 in December, from 49.1 in November.

“Combined with the manufacturing PMI, data suggest that Indian GDP is set to grow in Q3 2016-17, but a slowdown is likely,” Lima added.

Indian services providers signalled optimism on the 12-month outlook during December although the level of optimism has fallen to the third-lowest in over 11 years of data collection, the survey said.

“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 demonetisation downturn is unlikely,” Lima said.

Though there are expectations of a rebound in demand in coming 12 months, worries towards the speed of the recovery following the cash recall hampered confidence, the survey stated.

Fast moving consumer goods companies are likely to report a 5-6 per cent drop in net profit during the third quarter due to the hit on sales that they witnessed post-demonetisation drive, says a brokerage report in the run-up to the earnings season beginning this week.

“We expect the third quarter to be a dismal period for the FMCG companies as their aggregate revenue and net profits are likely to decline by 0.2 per cent and 5-6 per cent, respectively,” Kotak Institutional Equities said in its pre-earnings season report.

The report attributes this fall to a 120 bps pretax aggregate pretax margin contraction, due to 50 bps contraction in aggregate gross margins owing to pick-up in raw material inflation, led by agri-inputs. This is despite the despite 30 -40 bps cut in advertising and sales promotions budget.

The government had on November 8 banned old Rs 1,000 and Rs 500 banknotes worth around Rs 20.51 trillion, in a bid to control black money and counterfeit notes.