Modi’s Cash Clampdown Set to Shrink India Services Sector

(Bloomberg) -- India’s economy will be hurt by Prime Minister Narendra Modi’s shock clampdown on cash, private surveys signaled before the central bank’s interest-rate review on Wednesday.

The Nikkei India Services Purchasing Managers’ Index was at 46.7 in November, a report showed on Monday, the lowest since December 2013 and below the 50-mark that indicates a contraction. Services contribute about 60 percent to the $2 trillion economy, dragging down the composite PMI to 49.1, the lowest since March 2014. Reports last week showed manufacturing will also slow in the final months of 2016 after a disappointing July-September GDP growth.

"New business declined for the first time since June 2015, leading to a solid reduction in activity," Monday’s report said. "In spite of the falls in output and new orders, optimism regarding future activity improved. Input costs were broadly unchanged, whereas prices charged decreased slightly."

The data are among the first inputs Reserve Bank of India Governor Urjit Patel will receive as he prepares to review policy. Most economists in Bloomberg surveys predict he will cut borrowing costs this week as India stands to lose its status as the world’s fastest-growing big economy.

Read: World-Beater Status at Risk as India Rebuts Threat to Growth

The November services PMI data showed:

• Activity dropped in three of six monitored sectors
• New business index halted 16 months of gains
• Backlogs rose due to delayed payments from clients
• Employment rose marginally following October stagnation
• One in four firms surveyed forecast activity growth in the coming 12 months; they cited replacement of high- rupee notes, the withdrawal of unregulated companies from the market, improved advertising and favorable government policies

Patel will lower the benchmark repurchase rate to 6 percent from 6.25 percent on Wednesday, according to 23 of 28 economists in a Bloomberg survey. Two predict a cut to 5.75 percent while three see the rate unchanged.

Gross domestic product, which grew a slower-than-estimated 7.3 percent in July to September, will slump to 6.5 percent this quarter, according to the median estimate in a Bloomberg survey of 12 economists published late-November. That’s weaker than the previous 7.8 percent projection and the 6.7 percent forecast for China.