India's services activity showed no signs of a recovery in December — the first full month after demonetisation — and contracted further, reflecting a steeper fall in incoming work as backlogs continued to rise and employment decreased marginally.
The Nikkei India Services Business Activity Index out on January 4 showed a reading of 46.8 in December. The reading is little changed from November's 46.7, indicating a further solid contraction in output.
The index survey widely blamed the government's note ban for the deterioration in economic conditions. The rate of contraction in new projects was the fastest since September 2013, implying that the decline reflected shortage of money in the country.
Earlier on January 2, India's PMI Manufacturing Survey reading marked the first month of contraction in the calendar-year 2016 for December as it dropped to 49.6 from 50.3 in the previous month.
With factory output also falling, activity across the private sector economy dipped to the lowest in over three years. This was highlighted by the seasonally adjusted Nikkei India Composite PMI Output Index recording 47.6 in December, from 49.1 in November.
Meanwhile, for services activity, the downturn was broad-based by sub-sector, with hotels and restaurant firms being the worst performers.
However, Indian service providers remain optimistic regarding the 12-month outlook for activity, although the level of positive sentiment dipped to the third-lowest in over 11 years of data collection. A rebound in demand is expected in the coming 12 months, but worries towards the speed of the recovery following the rupee demonetisation hampered confidence.
Commenting on the Indian Services PMI survey data, Pollyanna De Lima, an economist at IHS Markit and author of the report, said: "The Indian service economy ended 2016 on a grim note, with the average PMI activity index reading for the Oct-Dec quarter the lowest since early-2014. Combined with the manufacturing PMI, data suggest that Indian GDP is set to grow in Q3 FY16/17, but a slowdown is likely."