Services sector sees slump in Dec; companies remain upbeat on 2021

India’s services sector activity expanded at a slower pace in December as rates of growth in sales eased to a three-month low and staff hiring came to a halt amid weak business optimism, a monthly survey said on Wednesday.

Background

The service sector of India, which includes IT, ITes, and hospitality, contributes 60 per cent to the GDP. The corresponding figure in China is 52 per cent. 

The gross value of IT, ITes and Fintech alone to the was $155 billion in 2016-17, with a potential growth projection of 10-15 per cent per annum. 

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According to Government of India data, the contribution of the healthcare industry was over $110 bn for the same period and was projected to touch $280 bn by 2020. 

ISBA index

The seasonally adjusted India Services Business Activity Index fell from 53.7 in November to 52.3 in December.

The index was above the critical 50 mark that separates growth from contraction for the third month in a row during December but pointed to the slowest pace of expansion in the three-month sequence.

“Although the news that the service sector remained in an expansion mode during December is welcome, the fact that growth lost momentum yet again should not be disregarded,” said Pollyanna De Lima, Economics Associate Director at IHS Markit.

Companies indicated that growth was supported by the securing of new work, though curbed by competitive pressures and the COVID-19 pandemic, the survey noted.

Also read: Setback to economic recovery: Core sector output shrinks 2.6% in Nov

Global COVID-19 restrictions, particularly travel bans, reportedly restricted international demand for Indian services at the end of 2020. New export business decreased sharply, but at the slowest pace since March.

“A spike in COVID-19 cases was reported as a key factor restricting the growth of new work intakes among service providers, which in turn curbed the rise in output and led to increased business uncertainty about the outlook,” Lima said. 

On the employment front, staff hiring came to a halt due to liquidity concerns, labour shortages and subdued demand, while business optimism faded.

“Given the damaging impact of the pandemic on the service economy, some companies are facing financial difficulties, which is preventing staff hiring. December saw the ninth round of job shedding in ten months,” Lima said.

On the price front, a pick-up in input cost inflation was witnessed, the strongest since February, but a renewed fall in selling prices was seen as some firms sought to beat the competition and secure new work, the survey said.

Also read: Farm contribution to GDP dips; so does farmers’ income in past decades

Although private sector activity continued to increase at the end of the year, the upturn eased to a three-month low. The Composite PMI Output Index, which measures combined services and manufacturing output, fell from 56.3 in November to 54.9 in December.

However, companies maintained an upbeat view that output will increase in 2021. “It is clear that the early part of 2021 will continue to be challenging, but we are looking at a sustainable recovery and some return to normality once COVID-19 vaccines become available,” Lima said.

India’s economy recovered faster than expected in the September quarter as a pick-up in manufacturing helped the gross domestic product (GDP) clock a lower contraction of 7.5 per cent and held out hopes for further improvement on consumer demand bouncing back.

Also read: India on recovery path but second COVID wave tripping economies: FM

The GDP had contracted by a record 23.9 per cent in the first quarter of 2020-21 fiscal (April 2020 to March 2021) as the coronavirus lockdown pummelled economic activity. 

Challenges

A challenge that stares at the service sector is providing value-added services at a reasonable employee cost. The labour cost was always kept at a low but experts point out that to break a certain threshold and move up, the service delivery should be made world-class by upscaling local talent and infusing global capabilities. The service sector, being human-oriented, needs a high level of salary and skill addition to attain this. 

As per a report in investindia.gov.in, the on labour market arbitrage. Moving forward, India can no longer rely on ‘low cost’ for ‘low value-added’ services.  

(With inputs from Agencies)