Inflation, slow business push service sector PMI to six-month low

Slow business inflows, inflationary pressures, and competitive conditions pushed service sector activities to a six-month low in September, a monthly survey has revealed.

The S&P Global India Services PMI Business Activity Index, which is seasonally adjusted, fell to 54.3 in September. It was 57.2 in August. This is the weakest rate of expansion since March.

However, the service sector had an expansion in output for the 14th straight month. In Purchasing Managers Index (PMI) parlance, a score above 50 denotes expansion, while anything below 50 means contraction.

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Unfavourable conditions

“The Indian service sector has overcome many adversities in recent months, with the latest PMI data continuing to show a strong performance despite some loss of growth momentum in September,” said Pollyanna De Lima, economics associate director at the S&P Global Market Intelligence.

According to the survey, price pressures, an increasingly competitive environment, and unfavourable public policies restricted the upturn. Lima pointed out that the steep depreciation of the rupee towards September-end, thanks to interest rate hikes in the US, presented additional challenges to the Indian economy.

“Currency instability poses renewed inflation worries, as imported items become more costly. (It) undoubtedly means that the RBI will continue hiking interest rates to protect the rupee and contain price pressures,” Lima said.

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On September 30, the monetary policy committee (MPC) of the Reserve Bank of India (RBI) raised the key lending rate or the repo rate to 5.90 per cent—the highest since April 2019.

The Covid-19 effect

The MPC will also focus on withdrawing the accommodative policy stance to ensure that inflation remains within the target while supporting growth, RBI Governor Shaktikanta Das said.

According to Lima, further rise in inflation could damage consumer spending, dampen business confidence, and test the resilience of the Indian service sector in the coming months. But, at least for September, service providers were strongly upbeat towards growth prospects.

The survey noted that weak external demand weighed on overall sales, with international orders declining further in September. Each month has recorded contractions since the onset of Covid-19.

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The positives

However, the data highlighted a continued revival in business confidence, with sentiment at its highest in over seven and a half years.

Service providers signalled a further increase in operating expenses during September, thanks to higher energy, food, labour, and material costs.

On the employment front, capacity pressures moderated in September. But efforts to clear pending workloads and ongoing expansions in sales supported another round of job creation. However, employment rose at a slower rate than in August, the survey said.

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Slow sales

In a setback, the S&P Global India Composite PMI Output Index slipped from 58.2 in August to 55.1 in September. This index measures combined services and manufacturing output. The figures denote the weakest rate of expansion since March.

Private sector sales rose at the weakest pace in six months, amid softer increases in the manufacturing and services economies.

S&P Global compiles the S&P Global India Services PMI® from responses to questionnaires sent to a panel of around 400 service sector companies. Detailed sector and company workforce size, based on contributions to GDP, stratifies the panel. Data collection began in December 2005.

(With agency inputs)