Service sector activities have moderated a bit, as the widely-tracked HSBC Purchasing Managers’ Index (PMI) dropped to 56.5 points in February from 58 points in January.
However, Markit Economics, which compiles the data, says new business will support the services outlook in the coming months. Economists, though, are not in agreement with such optimism.
As for the overall outlook for the sector, the picture presents elements of hope. Confidence was at an eight-month high, as new business received by the service providers increased markedly during February. Inflationary pressures subsided, according to the PMI survey.
The HSBC India Composite Index — which covers both the manufacturing and service sectors — fell from January’s nine-month high of 59.6 to 57.8 in February. Services and industry are two dominating sectors of the Indian economy, constituting 80 per cent of the country’s GDP.
Any reading above 50 denotes expansion, while one below it shows contraction.
According to the PMI, there was optimism that service activity would rise over the next year on the back of higher new work intakes, supported by marketing initiatives, alongside ongoing improvements in market conditions.
“The activity in the service sector expanded at a slightly slower clip in February,” notes Leif Eskesen, HSBC’s chief economist (India & Asean).
“But a continued strong increase in new business and an uptick in the sentiment gauge suggest activity will remain well-supported in the months ahead.”
Inflationary pressures eased, as input prices faced by companies in India rose at the weakest rate in four months in February. However, Eskesen says input price inflation held steady and also remained above its long-term trend. Wage pressure, he notes, was the main culprit, prompting him to caution against monetary easing at this point of time.
“As the service sector activity is expected to stay relatively brisk and inflation is likely to hover above the comfort zone, RBI will have to approach the easing cycle cautiously,” Eskesen adds. “In addition, oil prices could have an impact on the timing, as well as speed of rate cuts.”
Backlogs of work in the Indian private sector increased marginally during February, while employment fell after two months of growth. On their part, economists point out that the industry’s below-par show in the past more than 2 consecutive quarters now will also weigh down on services, which has been holding up the economic growth.
According to Arun Singh, senior economist with Dun and Bradstreet, the industry has a lag impact of about 1-2 quarters on services.
India’s GDP was calculated to grow by 6.9 per cent this fiscal with the industry, weighed down by manufacturing, to expand only by 3.9 per cent against 7.2 per cent last fiscal. Services are pegged to grow by 9.3 per cent — same as last fiscal.