December PMI at 49.6; manufacturing sector contracts for the first time in 2016

The Purchasing Managers Index (PMI), an indicator of economic health of manufacturing sector of a country, deteriorated further to 49.6 in December as against 52.3 in November. This was the slowest growth of manufacturing seen in 2016 which has been negatively affected by cash crunch in the economy post currency demonetisation.

A PMI reading below 50 indicates economic contraction, while one above 50 points toward expansion. The Indian PMI had shown continued rising trend over the past months on the back of higher manufacturing activity in the country. However, the good run came to an abrupt end, courtesy the demonetisation drive which has hurt the manufacturing sector harshly.

The PMI is an economic indicator derived from monthly surveys of private sector companies. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

The PMI data for December indicated that the rupee demonetisation took a toll on manufacturing performance as companies saw new work and output dip for the first time in 2016.

Experts have widely blamed the withdrawal of high-value rupee notes for the downturn, as cash shortages in the economy reportedly resulted in lower level of new orders. Businesses also highlighted challenging conditions in external markets, as new orders from abroad also slowed down.