July Services PMI contracts, 1st fall in 20 months

The decline is steepest since April 2009

In July, the services sector, the largest in the Indian economy, contracted for the first time since October 2011, according to the HSBC Purchasing Managers’ Index (PMI). The index dived to 47.9 points from 51.7 points in June, the steepest fall since April 2009, when the economy had faced the ripple effects of the global financial crisis. After April 2009, the sector had recorded contraction only in September and October of 2011.

The fall in the services PMI in July was despite the government taking a slew of decisions to further open the sector to foreign direct investment.

According to data released last week, manufacturing PMI stood at a disappointing 50.1 points in July, against 50.3 points in June. A reading of more than 50 indicates growth, while one below it shows contraction. As a result, the composite PMI (for the manufacturing and services sectors) plummeted to 48.4 points from 50.9 points in June, the first such decline in about four years.

In 2012-13, economic growth had fallen to a decadal-low of five per cent. For this financial year, the Reserve Bank of India (RBI) has already cut its growth projection from 5.7 per cent to 5.5 per cent. The PMI reading for July showed the wait for a recovery in growth would take longer than anticipated.

According to Markit Economics, the financial firm that compiled the data for the PMI, the transport, storage and renting segments were the “main drivers of the overall decline” in July. “Activity in the services sector contracted in July, led by a drop in new business, which also led to a decline in optimism among the surveyed companies,” said Lief Eskesen, HSBC chief economist for India and the Association of Southeast Asian Nations.

However, many feel the services PMI isn’t a good indicator of growth in the sector. “In the Indian context, services PMI takes into account only large companies. Therefore, I will not worry too much about it, as the Indian market is dominated by the smaller entities on the services side, which are simply not covered by this data,” said Pronab Sen, chairman of the National Statistical Commission.

In September 2011 and October 2011, the services sector had seen contraction, according to PMI. However, the sector (excluding construction) grew 8.5 per cent in the second quarter of 2011-12 (which includes September 2011) and 8.2 per cent in the third quarter (which includes October 2011), according to official data on gross domestic production.

On RBI’s rate cut policy, Eskesen said, “While RBI has to cater to the currency at the moment, it will eventually need to cater more to growth, as economic activity continues to soften.”

“My personal view is RBI should go for a rate cut, but keep the money supply tightened, as it has done because one cannot ignore the widening current account deficit,” Sen said.

According to the monthly PMI survey report, in July, new orders to private sector firms fell for the first time since April 2009, owing to the increasingly fragile economic conditions. “Manufacturing and services companies both signalled lower volumes of incoming new work, with the rate of contraction faster in services,” said Markit Economics. “While the rate of charge inflation in the manufacturing sector accelerated to the quickest since February, prices charged by service providers rose at the slowest pace in the current 33-month inflationary sequence,” it added.

Markit Economics panel members involved in the research said to attract new business, discounts would be offered.