The surprise from the Nikkei Indian Manufacturing Purchasing Managers’ index was not that the survey-based yardstick dipped below 50 in December 2016, indicating the negative impact of demonetisation. Instead, what stands out from the survey is that the manufacturing PMI came in at 49.6, which indicates that the contraction has been marginal.
Indeed, as the chart shows, the manufacturing PMI a year ago, in December 2015, contracted even more, when it came in at 49.1. That was due to the Chennai floods. Moreover, since PMI measures month-on-month changes, note that the PMI contracted last month from a 52.3 reading in November 2016. On the other hand, the chart shows that the PMI contracted in December 2015 from a weak reading of 50.3 in November 2015.
That seems to suggest that the disruption due to demonetisation has been less than that due to the Chennai floods in December 2015. If true, it is markedly at variance with the anecdotal evidence on the impact of demonetisation. One explanation could be that the PMI measures output from the largest companies, while the pain of demonetisation would be felt most acutely in the unorganised sector.
Pollyanna De Lima, economist at Markit, said, “With the window for exchanging notes having closed at the end of December, January data will be key in showing whether the sector will see a quick rebound.”