Demonetisation impact: India's manufacturing output may take a hit

In September 2016, the Index of Industrial Production (IIP) growth displayed a positive print after two-consecutive month’s contraction. IIP for September stood at 0.7% versus the (-)0.7% recorded in August 2016. 

Demonetisation is currently underway and severe cash crush in Indian economy is likely to sustain for a few days more. This is going to have an impact on India'a factory output. Madan Sabnavis and Anuja Shah Economists of Care Ratings said, "Also the recent demonetisation measure will push back consumer spending, that can slowdown sales growth in Q3. While there could be a recovery with a lag, industrial growth would be sluggish and we could now end the year with growth of 1-2%. "

Suvodeep Rakshit, Economist of Kotak Institutional Equities said, “ While a gradual improvement in consumer sector production can be expected on the back of 7 Pay Commission payouts and monsoon-led rural demand, we need to be cautious on the degree of demand slowdown due to the recent demonetisation measures in a significantly high cash economy.”

Another was a report by Abhishek Kumar of Dalal Street journal stated that many analysts’estimates October IIP numbers to be on the strong side, on the back of festival season. However, the situation is expected to turn sour thereafter from November, which would clearly have a negative impact of currency demonetisation.

On November 08, PM Narendra Modi announced the ban of Rs 500 and Rs 1000 notes in a move to tighten screws on black money. 

High-denominations notes account for nearly 86% of currency in circulation in India. Till March 2016, there were about 15,707 million of Rs 500 notes and somewhat 6326 million of Rs 1000 notes, as per the Reserve Bank of India data. 

He said, " The sluggish industrial sector further lends acceptance to our view that growth slack will keep output gap negative and will ensure that any upside risk to inflation emerging from the demand side will be contained. This argument could gain further strength in the event that the recent demonetization measures hit discretionary consumption demand."