NEW DELHI: Manufacturing activity in the country contracted in December as output and new orders fell for the first time in one year due to the cash crunch after the government scrapped some high value notes in early November, a survey showed on Monday. The Nikkei India Manufacturing Purchasing Managers’ Index (PMI) recorded below the crucial 50 point threshold for the first time in 2016. It fell to 49.6 in December from 52.3 in November. The 50 point mark separates expansion from contraction.

Separate data released by the Commerce and Industry Ministry showed core sector output growth rose an annual 4.9% in November slower than the previous month’s increase of 6.6%. The sector spanning coal, crude oil, natural gas, refinery products, fertilizers, steel, cement, electricity grew 0.6% in November 2015. It accounts for 38% of the index of industrial production. Electricity, coal and steel showed robust growth, while crude oil and natural gas output contracted in November.

The PMI survey showed quantities of purchases were scaled back and employment lowered. Four of the five sub-components of the PMI edged below 50, while average delivery times lengthened further. At the sector level, operating conditions deteriorated in both the consumer and intermediate goods categories.

“Having held its ground in November following the unexpected withdrawal of Rs 500 and Rs 1,000 bank notes from circulation, India’s manufacturing industry slid into contraction at the end of 2016. Shortage 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. Cash flow issues among firms also led to reductions in purchasing activity and employment,” said Pollyanna De Lima, economist at IHS Markit.

The survey widely blamed the withdrawal of high-value rupee notes for the downturn, as cash shortages in the economy reportedly resulted in fewer levels of new orders received. Concurrently, manufacturers lowered output accordingly. “Rates of contraction in new work and production were marginal overall, but in both cases the reductions were the first in 2016. Businesses also highlighted challenging conditions in external markets, with a fall in new business from abroad ending a six month sequence of growth,” according to the survey.

It said cash shortages and lower workplace activity resulted in job shedding and fall in buying levels during December. Payroll numbers decreased only marginally, however, as the vast majority of panellists signalled unchanged workforces. A similar trend was seen with regards to quantities of purchases.

The survey showed both pre- and post-production stocks decreased during December. The former saw the first monthly drop in 13 months, while inventories of finished goods declined for the eighteenth month running (albeit to the least extent in this sequence). Cash flow issues reportedly impaired manufacturers’ ability to work on outstanding business. Backlogs rose for the seventh consecutive month, but at the slowest rate in this sequence, the survey showed.