Business activity in India’s service sector is gaining momentum at a rapid pace. The seasonally adjusted S&P Global India Services PMI Business Activity Index rose to 59.2 in June, from 58.9 in May. This is the highest point of the headline index since April 2011. A reading above 50 indicates expansion.
The acceleration in growth was broad based on the four monitoring sub-sectors, the PMI survey report said. Panelists attributed the boom in business to the easing of pandemic restrictions, capacity expansion and the ongoing recovery in demand amid a favorable economic environment.
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This striking rebound in the services sector offset sluggish growth in the manufacturing industry. The seasonally adjusted S&P Global India Manufacturing PMI fell to 53.9 in June, from 54.6 in May. The headline index reading is above 50, indicating expansion, but the latest figure was the lowest since September last year.
Adam Hoyes, assistant economist at Capital Economics Ltd., said PMI is now higher by manufacturing measurement than at any time since 2010.
“Taken together, the surveys support the forecast for strong gross domestic product (GDP) growth in Q2 (June quarter), and suggest that strong demand drives businesses in the very large services sector to increase interest rates and higher inflation. giving away, for now,” Hoyce said. The services sector is estimated to contribute about 55% of India’s GDP growth.
Input cost inflation eased to a three-month low in June, but remained high by historical standards for service providers. A similar trend was observed for Indian manufacturers in the June survey. However, unlike manufacturers, who also saw a decrease in the production price index, the service output price index rose to 53.9 in June, from 53.3 in May. This is the fastest rate of increase in prices since July 2017.
This is the worrying part. Sharp increases in prices by service providers as they attempt to pass on cost inflation can dampen demand. Barclays economists have cautioned that tighter domestic financial conditions and a weak global growth outlook are counterproductive to the ongoing recovery in the services sector.
Inflation continues to be a matter of concern for both service providers and manufacturers. The Services PMI report noted that while companies were cautiously optimistic about the year-forward outlook for business activity, the overall level of sentiment was well below its long-term average. Only 9% of companies surveyed forecast production growth.
However, as the third chart shows, the business expectation index for services, or the future output index, saw only a slight decline in June. On the other hand, trade optimism among manufacturers fell to a 27-month low of 50.9 in June. Moreover, Indian manufacturers were least confident on the growth outlook in the manufacturing sector as compared to their global counterparts.
Meanwhile, even as PMI surveys indicate some moderation in cost inflation, retail inflation in India has picked up and the Reserve Bank of India (RBI) is expected to continue with its monetary policy normalisation.
“The latest PMI prints indicate some moderation in price pressure, but remains above the longer-term average,” said Gaura Sengupta, Indian Economist at IDFC First Bank. Consumer Price Index (CPI) inflation is expected to remain above RBI’s upper limit of 6. 23% for the majority of the fiscal year, she said. “If there is a significant fall in price pressure that brings down the average CPI in Q4FY23, we may see a softer hike in the repo rate. However, for the next few policy meetings, rate hike remains on the table,” he said.