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Cash crunch in India leads to contraction

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NEW DELHI: Indian factory activity plunged into contraction last month as a cash crunch following Prime Minister Narendra Modi's currency crackdown severely hurt output and demand, a survey found yesterday.

The Nikkei/Markit Manufacturing Purchasing Managers' Index fell to 49.6 last month from November's 52.3, its first reading below the 50 mark that separates growth from contraction since December 2015. It was also the biggest month-on-month decline since November 2008, after the collapse of Lehman Brothers brought on a global recession.

"Having held its ground in November following the unexpected withdrawal of 500 and 1,000 bank notes from circulation, India's manufacturing industry slid into contraction at the end of 2016," said Ms Pollyanna De Lima, economist at survey compiler IHS Markit.

"Shortages of money in the economy steered output and new orders in the wrong direction, thereby interrupting a continuous sequence of growth that had been seen throughout 2016."

The output sub-index at 49 was its lowest this year. The new orders sub-index, which measures foreign and domestic demand, was also knocked to its weakest last year.

Contractions in momentum were reported across all major sub-indexes in the survey, such as purchasing activity and employment, highlighting the blow to the economy after the government's demonetisation drive.

Mr Modi's decision to scrap high-value bank notes as part of a crackdown on tax dodgers and counterfeiters removed 86 per cent of the currency in circulation virtually overnight, denting consumption in a cash-dependent country.

Economists have begun slashing gross domestic product forecasts and some of the more pessimistic views are that growth will halve from the 7.3 per cent year-over-year rate clocked in July to September, especially as consumer spending accounts for over half of India's output.