The introduction of the Goods and Service Tax (GST) has pushed down activity in the services sector to a nearly four-year low in July even as manufacturing activity reels at an eight-and-a half-year low.
The widely-tracked Nikkei Purchasing Managers’ Index (PMI) on Thursday showed that PMI for the dominating sector of the Indian economy plunged to 45.9, its lowest level since September 2013. At an eight-month high, PMI had been 53.1 in the previous month of June.
The 50-point mark separates expansion from contraction.
Output and new work declined for the first time since January, with rates of reduction the quickest since September 2013. This had an adverse effect on the labour market, with employment contracting over the month. Likewise, factory orders decreased in July, and at the quickest pace since February 2009.
According to survey participants, confusion over GST was mentioned by services firms as having caused a contraction in new work, leading to lower activity. This is in stark contrast to improving demand conditions and marketing efforts leading to a higher share of new work over the past four months. "Services firms saw a severe cut in invoicing as newer rules regarding exports kicked in," Ranen Banerjee, partner (public finance and economy) at PricewaterhouseCoopers, said.
"The downturn in services follows similar weakness in manufacturing, to make a double-whammy of disappointing news
at the start of the second quarter of the 2017/2018 financial year. Private sector activity dipped for the first time since the demonetisation shock and to the greatest extent since early 2009, mirroring the sales trend," Pollyanna De Lima, principal economist at IHS Markit — which compiles the data — and author of the report, said.
On the price front, input cost inflation eased from June, while charges were raised to the greatest extent since early-2013. This was a result of higher tax rates and salaries awarded to staff. Nonetheless, the rate of inflation softened since June and was well below its long-run average, the survey showed.
Those companies that reported higher selling prices again quoted the GST. However, producers offered discounts amid efforts to stimulate demand. The drop in factory charges was the first in 17 months.
Released two days back, similar data for the manufacturing sector had shown manufacturing PMI contracting to 47.9 points in July, down from 50.9 in June. Factory activities had last fallen in December 2016 after demonetisation. Implementation of the GST led to outputs, new orders, and purchasing activity seeing their steepest fall since early-2009, De Lima said.
Consequently, companies purchased fewer quantities of inputs for use in the production process, leading to an overall decline in holdings of raw materials and semi-finished items, data showed.
As a result of all this, the Nikkei India Composite PMI Output Index, which maps both the manufacturing and services sectors, fell sharply from the eight-month high of 52.7 in June to 46.0 in July.