Hit hard by the demonetisation move, the manufacturing sector contracted in December as new work orders and output took a knock for the first time in 2016, a monthly survey has showed.
The Nikkei Markit India Manufacturing Purchasing Managers' Index (PMI) -- an indicator of manufacturing activity -- fell to 49.6, down from 52.3 in November.
The index came in below the crucial 50 threshold – which separates contraction from expansion -- for the first time in 2016 in December.
"Having held its ground in November following the unexpected withdrawal of Rs 500 and 1,000 bank notes from circulation, India's manufacturing industry slid into contraction at the end of 2016," said Pollyanna De Lima, economist at IHS Markit and author of the report.
Lima added that, "Cash flow issues among firms also led to reductions in purchasing activity and employment".
Survey participants widely blamed the withdrawal of high-value rupee notes for the downturn as cash shortage in the economy reportedly resulted in fewer levels of new orders.
Businesses also highlighted challenging conditions in external markets, with a fall in new businesses from abroad ending a six-month long growth.
Though December saw a mild decline in manufacturing output, the average reading for October-December remained in the "growth terrain", suggesting a positive contribution from the sector to overall GDP in the third quarter of 2016-17, the survey said.
"With the window for exchanging notes having closed at the end of December, January data will be key in showing whether the sector will see a quick rebound," Lima added.
The report said the higher prices paid for a range of raw materials made average cost burden increase for the 15th straight month in December, with the rate of inflation picking up since November.
Image used for representational purpose only. Photograph: Mukesh Gupta/Reuters.