New tax roils India's economy with PMI plunging most since 2009

[MUMBAI] Business conditions in India have deteriorated the most since the global financial crisis as the roll out of a nationwide sales tax disrupted supply and distribution links just months after Prime Minister Narendra Modi's cash ban roiled markets.

The Nikkei India Composite PMI Output Index fell to 46 in July from 52.7 in June, the steepest drop since March 2009, a report showed Thursday.

Activity in the key services sector plunged to 45.9 from from 53.1 - the lowest since September 2013 - after data showed manufacturing slumped the most since 2009. A reading below 50 indicates contraction.

"Private sector activity dipped for the first time since the demonetisation shock" and "most of the contraction was attributed to the implementation of the goods and services tax and the confusion it caused," Pollyanna De Lima, principal economist at IHS Markit, said in the report.

"Faced with fewer workloads, service providers and manufacturers lowered payroll numbers in July."

The data add to evidence of underlying weakness in one of the world's fastest-growing economies. The central bank on Wednesday cut rates to the lowest since 2010 and urged the government to speed up projects because there's "an urgent need" to boost private investment.

However, rates of job shedding - while the fastest since early 2009 - were "slight overall", according to the report. Firms seem convinced that prospects will brighten as the GST regime becomes clearer, Ms De Lima said.

BLOOMBERG