Services Sector contracts again in December 2016

India's service sector contracted for the second consecutive month in December following a decline in orders due to the demonetisation. The Nikkei Markit Services Purchasing Managers' Index was 46.8 in December, nearly unchanged from 46.7 in November. A reading above 50 indicates expansion and a figure below that indicates contraction.

The Indian service economy ended 2016 on a grim note, with the average PMI activity index for the Oct-Dec quarter the lowest since early-2014.

A survey showed a contraction in manufacturing for the first time in 2016 and the two survey reports show activity across the manufacturing and services services sectors, which together account for nearly 80% weightage in the economy dipped sharpest in more than three years.

The seasonally adjusted Nikkei India Composite PMI Output Index read 47.6 in December against 49.1in November.

Putting the two data sets together, “a slowdown is likely“ even though GDP is set to grow in the third quarter ended December 31. Economists have slashed growth estimates to below 7% while so me have pencilled in sharper cuts.

The Indian economy expanded 7.6% in 2015-16.

The downturn in the services sector was broad-based with Hotels and Restaurants being the worst performers.

The survey 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.

On employment front, service providers made cutbacks to staffing levels in December though it was fractional.

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