Demonetisation takes toll on investment, manufacturing

The worst fears about demonetisation taking a toll on the economy seem to be coming true.

There has been a sharp fall in new investment proposals since 9 November—the day the government’s decision to invalidate high-value currency notes came into effect, shows data released by the Centre for Monitoring Indian Economy Pvt. Ltd (CMIE).

This sombre prognosis is reaffirmed by the Nikkei Markit India Manufacturing Purchasing Managers’ Index (PMI) which, for the first time in 2016, shows manufacturing contracting in December.

Previously, economists and global financial institutions lowered India’s growth projections for 2016-17 to less than 7%, citing the slowdown in economic activity from the cash crunch in the economy following the scrapping of Rs500 and Rs1,000 banknotes, which accounted for 86% of the money in circulation.

The Indian economy grew at 7.6% in 2015-16.

CMIE data shows investment proposals amounting to Rs1.25 trillion in the October-December quarter as compared with an average of Rs2.36 trillion worth of new investments seen per quarter in the preceding nine quarters that the Narendra Modi government has been in power.

Within the quarter ended December, the fall in investment activity is even more evident if one looks at the pre- and the post-demonetisation periods. While 227 new investment proposals worth Rs81,800 crore were announced during the quarter till 8 November, only 177 investment proposals worth Rs43,700 crore came in between 9 November and 31 December.

“Evidently, uncertainties caused by demonetisation have played a role in the fall in the flow of investments. The investment climate has been weak for some time. This is now expected to remain weak for some more time,” said CMIE.

Separately, the Nikkei Markit India Manufacturing PMI showed that manufacturing in India contracted for the first time in 2016 in December. The index came in at 49.6 in December as against 52.3 in November.

A reading below 50 signifies contraction from the previous month, while one above 50 indicates expansion.

“Companies saw new work and output dip for the first time in 2016. In turn, quantities of purchases were scaled back and employment lowered,” Nikkei said, attributing the contraction to the partial demonetisation of currency.

The slowdown in economic activity is also evident in the sharp fall in bank credit to different sectors in November. Data released by the Reserve Bank of India last week showed that credit offtake slowed to 4.8% by November.

Sunil Kumar Sinha, principal economist, India Ratings & Research, said it is not a surprise that economic activity has been impacted by demonetisation.

“Credit disbursement has not taken place as banks do not have time to scrutinize investment proposals. The informal sector has been badly hit. Many industrial units have also shut down or reduced shifts,” he said, adding that demonetisation has not only disrupted the cash-dependent unorganized sector but also the organized manufacturing sector.

“Demonetisation has impacted consumption demand and several industrial sectors associated with both consumer durables and non-durables,” he explained.

Core sector data released by the commerce ministry on Monday also showed that growth moderated to 4.9% in November, as against 6.6% in the preceding month.

Growth of cement and steel output slowed sharply in November relative to the previous month, a clear indication of the short-term impact of the note ban on domestic demand in cash-intensive sectors such as construction and real estate, said Aditi Nayar, principal economist, Icra Ltd, in a note.

“Data for various lead indicators of economic activity has displayed a mixed trend in November 2016, with healthy production in the organized sectors; disruptions in the labour/cash-intensive and relatively unorganized sectors resulting in a loss of income for businesses and workers; and deferral of discretionary consumption,” she said. Nayar added that sluggish consumption is expected to weigh upon capacity utilization in the second half of 2016-17, delaying private sector investment plans.