Car sales in India fell for the first time in 11 months in December, as a cash shortage triggered by the 'demonetisation' withdrawal of high denomination banknotes reduced retail spending.

According to data from the Society of Indian Automobile Manufacturers (SIAM), sales of passenger vehicles, including cars and sport-utility vehicles, fell 1.36% to 227,824 units last month from a year earlier. However, deliveries of utility vehicles grew about 30% to 58,309 units, the data showed.

SIAM also reported that total two-wheeler sales dropped 22% in the month to 910,235 units.

Market leader Maruti Suzuki reported a 4.4% drop in domestic sales to 106,388 vehicles from 111,333 units a year earlier.

SIAM said sales of passenger vehicles are likely to increase as much as 12% this fiscal year (to the end of March) - which would put the annual market at around 3m units.

The market data is in line with other indicators showing that the Indian government's 'demonetisation' reform has hit India's domestic economy.

The reform measures included - in November - the sudden withdrawal of Rs500 (US$7.40) and Rs1,000 (US$14.80) banknotes (to be replaced by new Rs500 and Rs2,000 notes with better security features). These bills are the highest denomination notes in circulation and account for about 85% of all currency bills in circulation.

The move was aimed at hitting India's black market, high levels of corruption, tax evasion and counterfeit currency. However, 98% of India's economy is cash based and poor preparatory work meant that a severe cash shortage resulted, with commerce seized up. The Indian economy will take a negative hit that will last into the first quarter.

"The impact of this could last into the first few months of 2017," says analyst Deepesh Rathore. "And it raises fresh concerns over the government's ambitious reform agenda. The intention was laudable, but it has been botched."

Further hitting domestic demand are uncertainties about a new unified national tax rate India is planning to introduce later this year. Consumers may also be sitting out the market until after the government's annual budget on February 1.