India’s services sector is on a strong footing even as the momentum cooled off last month, albeit slightly. The seasonally adjusted S&P Global India Services PMI Business Activity Index eased to 60.1 in August from 62.3 in July. A reading above 50 indicates a month-on-month expansion. The moderation in the headline index is not surprising after the July reading had hit a multi-year high amid a challenging demand scenario globally.
Note that in August, services firms saw one of the strongest increases in output since mid-2010. The headline index got a boost from improved export demand as local demand softened.
The sub-index tracking new export orders rose to 55.5 in August from 54.5. With that, services companies saw the sharpest upturn in new export business since September 2014. Asia Pacific, Europe, North America, and the Middle East were among the sources of sales gains, said the PMI report. Counterparts in the Indian manufacturing sector also saw an increase in international sales in August. For goods producers, the index gauging new export orders rose to the greatest extent since November 2022.
But it might help to be cautious.
“Last month’s moderation was more pronounced than we expected, though the historical outperformance of this gauge (services headline index) is living on borrowed time, especially when considering that the future activity sub-index has been below its long-run average since the start of this year,” said economists at Pantheon Macroeconomics in a note dated 5 September.
Note that services firms saw faster increases in the index measuring prices charged/selling prices in August compared to input costs. Consumption demand seems to be robust for now, giving services firms some leg room to raise prices. However, in the run-up to the festival season, it remains to be seen whether this pricing power among services providers sustains.
What is more, steep price hikes are also feared to translate into elevated inflation. In that case, it might have a bearing on the Reserve Bank of India’s (RBI) monetary policy decision.
“We expect RBI to remain on pause in FY24 with growth recovery holding-up and inflation remaining above the 4%-target,” said Gaura Sen Gupta, economist at IDFC First Bank. She expects consumer price index inflation to average 5.8% in FY24 versus RBI’s estimate of 5.4%, due to the surge in food inflation in the September quarter. “Core inflation is expected to remain contained at around 5% in FY24, assuming no second-round effects from the surge in food inflation,” she added.
As things stand, services providers are upbeat on demand outlook with output expected to be on an upward growth path over the next 12 months.
This optimism stems from advertising, demand strength, plans to price competitively and a healthy number of client enquiries, said the survey report. Consequently, the Future Activity Index—a gauge of business sentiments among services providers—climbed to its highest in 2023 so far.
Going ahead, the services sector is expected to continue to do the heavy-lifting for India’s gross domestic product growth (GDP). But the ride is unlikely to be smooth.
“While domestic demand for services in the September quarter, as seen in high-frequency indicators (such as airline passenger traffic, bank deposit growth, credit card loans) remains robust, some easing is seen in rate of services exports as external demand remains weak,” said a report by Barclays Securities (India) dated 5 September. “Overall, we expect services to continue to anchor growth this year (mostly led by domestic demand),” added the report.