India’s service sector index hits a 1-1/2-yr low of 46.7 in Nov

Service sector activity in the country contracted in November with the Nikkei / Markit Services PMI contracting to a low of 46.7 hit by Prime Minister Narendra Modi's surprise move to withdraw high denomination banknotes, new survey results released on Monday showed.

The Nikkei / Markit Services Purchasing Managers' Index sank to 46.7 in November from 54.5 in October, the first time since June 2015 that the index has gone below the 50 mark that separates growth from contraction.

The service sector PMI was 54.5 in October, making it the biggest one-month drop in services activity since 2008.

The service sector makes up over 60 per cent of India's gross domestic product, so a contraction there is likely to drastically weaken the growth outlook.

Companies were heavily impacted by the withdrawal of the Rs500 and Rs1,000 notes.

The latest service sector data, coupled with a slump in factory activity reported last week, points to the massive hit the economy from the demonetisation drive.

PM Modi's decision last month to scrap high-value banknotes, aimed at curbing corruption and tax evasion, removed 86 per cent of the currency in circulation virtually overnight, which led to a rationing of new notes, which is still in short supply.

IHS Markit said the cash-driven economy saw financial services, hotels, restaurants, renting and business activities suffer the most as consumers curbed discretionary spending.

The cash shortages prompted firms to offer discounted prices at a steeper rate than in October, as they competed among themselves for the limited cash available with consumers.

A slowdown could rob India of its fastest growing major economy tag, although for the short run. Some of the more pessimistic views are that growth will halve from the annual 7.3 per cent clocked in July-September.