Demonetization Series: India PMI reports provide evidence of demonetization shock

On the last working day of 2016, the timeline that was given by the government to Indians to change or deposit their old notes ended, but that hardly means the measures taken up by the government during the demonetization process is over or the economic turbulence has bottomed. Indians are still barred from withdrawing more than INR2500 using their debit cards and barred to withdraw more than INR 24,000 per week by any means from their accounts in banks. Previously the ATM limit was 10 times the current figure and there were no withdrawal limits from banks on a daily or weekly basis.

Indian Prime Minister Narendra Modi has pushed Indians to move to a more digitized system of transactions but in a country, where hundreds of millions of people are daily wagers, millions who can’t afford any digital device or have access to electricity, where the 86 percent transactions were cash based before the demonetization, the digitization remains a luxury. The severe cash crunch that brought the economy to a standstill in November has definitely eased but is far from being over. As long as the withdrawal restrictions from the Reserve Bank of India (RBI) remain, the things are not as it used to be and that would continue to bear tough on economic activities.

The recent PMI reports released by the Markit economics provide first-hand evidence of the shock of the demonetization.

• Manufacturing PMI suffered the biggest month on month drop since the great recession of 2008. Output and new orders declined for the first time in a year. Companies reduced their buying levels and payroll numbers dropped. All the survey participants blamed the demonetization As of now, the impact on payrolls haven’t been dire but longer the restrictions, greater would be the pain.
• Before the demonetization move, India’s services PMI was recording figure above 54 but in November it declined to 46.7, indicating sharp contraction. And December PMI shows that the situation hasn’t improved much as the as it came at 46.8. In the December survey, service providers have indicated a solid drop in the incoming new work.

The biggest risk of demonetization remains the permanent damage to consumer confidence and a sustained decline in consumption.