Post Demonetisation, Manufacturing Slumps but Sticks to Expansion Mode

New Delhi: The first concrete set of economic data to be released since Prime Minister Narendra Modi scrapped old denomination notes of Rs 500 and Rs 1,000 on November 9 indicates that manufacturing in India has weakened in the month but companies surveyed felt demonetization will ignite growth in the long run.

The Purchasing Managers’ Index (PMI), a gauge that measures industrial activity, registered 52.3 in November, which was lower than October’s 54.4, which itself was a 22 month high. A reading over 50 indicates expansion in industrial activity while a reading below 50 indicates a contraction. Also Read: Gold Imports in December to Halve as Cash Crunch Squeezes Demand

The PMI is compiled every month from questionnaires sent to executives in over 400 industrial units across the sectors basic metals, chemicals & plastics, electrical & optical, food & drink, mechanical engineering, textiles & clothing, timber & paper and transport. The survey is done by IHS Markit, a firm that publishes market data and financial analytics. The data was collected from November 11-24.

According to the report the withdrawal of high denomination bank notes has hampered manufacturing growth, with the order books, buying levels and output of companies getting affected. Although there was higher demand from domestic as well as the export sectors, the cash crunch hampered growth. New export orders also lost momentum last month.Also Read: BofA Cuts FY17 Growth Forecast to 6.9% Amid Demonetisation

The consumer goods sector was one of the most affected.

Pollyanna De Lima, an economist at IHS Markit, said that although there was a downturn the industrial sector held its ground and remained in expansion mode. “Manufacturing performed relatively well given demonetisation,” De Lima told News18. “Many surveyed companies commented that further disruption is expected in the near-term, the demonetisation of the rupee is anticipated to ignite growth in the long-run as unregulated companies leave the market,” she added.

Markit also said that inflation in November has fallen. The data indicated that 96 percent of companies reporting unchanged selling prices.