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Cash Shortage Shrinks Services Sector
Wed, 7 Dec Pre-Open

The service sector is one of the largest contributors to India's economy. It contributes around 60% of GDP. Demonetisation has extended its impact over India's service sector as well.

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.

This is below the level of 50 on the index and denotes a contraction in production for the first time since June 2015.

The data comes days ahead of the policy review by the Monetary Policy Committee on Wednesday, when it is widely expected to lower interest rates.

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

Correspondingly, backlogs of work arose, while employment increased only marginally. This could be an early indicator of deceleration of the gross domestic product (GDP) in the December quarter.

According to an article in The Livemint, a contraction in India's service sector, which makes up over 60% of gross domestic product, is likely to weaken the growth outlook.

Also, a slowdown could rob India of its fastest growing major economy tag.

The PMI report stated that the drop in services activity was not surprising since the share of the unorganized sector in services, at 45% of the total according to data for 2004-05, was much higher than the 23% in manufacturing, suggesting a larger dependence on cash transactions.

However, business confidence has risen to a three-month high. The disruption in business activity is expected to be 'short-lived', with many experts anticipating a pick-up in activity as these high-value banknotes are replaced and black-market firms end their operations.

Meanwhile, the survey also reported that 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 next 12 months. Also, the reduction in money supply has curbed inflation for the month of November.

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Mar 23, 2018 (Close)