Sombre Prospect

The first official production numbers following the November 8 demonetisation suggest the impact of the measure was not as severe as feared that month, but two other sets of data indicate a turn for the worse from December. One indicates that manufacturing contracted for the first time in a year in December while the other points to greater wariness on the part of investors.

Core sector output rose 4.9% in November on the back of a strong expansion in steel production and electricity generation, though the pace is down from 6.6% in October. Part of the buoyancy was due to the base effect of lower 0.6% growth in November 2015.

The eight industries that make up the core sector: coal, crude oil, natural gas, refinery products, fertilisers, steel, cement and electricity, have a 38% weightage in the index of industrial production (IIP), suggesting that overall factory output may not have been tripped up by demonetisation in November.

That's backed up by data showing robust direct and indirect tax collections.

To be sure, there's been a sharp dip in growth in cement (6.2%) and steel (16.9%) output from October.

Economists expect the full impact of demonetisation to be visible in the December numbers, which will be announced on January 31. However, coal output bounced back into positive territory in November after three months of contraction to post 6.4% growth.

Electricity generation rose 10.2%, and steel production was up 5.6%. Cement posted a modest 0.5% output growth while refinery products and fertilisers were up 2% and 2.4%, respectively.

Overall, April-November core sector growth was up 4.9% against 2.5% last year. November 2016 tax collections added up to Rs.91,157 crore, a sharp increase from Rs.36,061 crore in the year earlier month.

Two separate data releases indicated that the effects of demonetisation may take a harsher turn from December. The Nikkei India Manufacturing Purchasing Managers' Index fell to 49.6 in December from November's 52.3, the first contraction in the past 12 months.

It's also the biggest monthly decline in the index since November 2008, the start of the global financial crisis. Both the output index and the new orders index sank to their lowest for the year.

Separately, data compiled by the Centre for Monitoring Indian Economy (CMIE) showed new investment proposals worth Rs 1.25 lakh crore in December quarter. This is low compared to the average Rs 2.36 trillion (Rs.2.36 lakh crore) worth of new investments seen per quarter in the preceding nine quarters of the Modi government.

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