June services sector PMI falls to 7-month low

Fall in new business drives down growth; firms were barely able to raise selling prices, suggesting RBI may have room to cut interest rates if inflationary pressures moderate

Activities in the services sector remained almost flat in June, as the pace of  new business growth slowed down,  Nikkei Purcashing Managers’ Index (PMI) showed. There was no additional employment generation in the month.

The index fell to a seven-month low of 50.3 in June, as compared to 51 points in May. The May figure was also the weakest since November  2015.

A reading above 50 shows  expansion, while one below that shows contraction.  

PMI cooled for the third straight month in June. Strong competitive pressures restricted new business gains, Markit Economics, the compiler of the survey, said.  

The growth of new businesses in services eased to the slowest in 11 months. The June data highlighted outstanding business at service providers increasing for the first time in five months, although slightly. This was mostly due to delayed client payments.

The survey showed June was no different for job creation, with almost all survey members reporting the same staffing levels as in May.

Broadly, stagnant employment trends have now been registered through the past 11 months. Likewise, manufacturing payroll numbers were unchanged.

For domestic services providers, costlier fuel and vegetables forced input costs to rise in June, marking a nine-month sequence of inflation. However, the rate of input cost inflation at services firms was moderate. Purchase costs faced by manufacturers also continued to rise, but at the slowest pace since March.

The improving demand environment enabled service providers to continue to pass on to their clients’ part of the additional cost burden.

However, the rise in charge inflation was modest.

Confidence among Indian service providers was at a four-month low, however. According to respondents, activity growth over the coming year is set to be supported by aggressive marketing campaigns. Nonetheless, some panellists expressed concerns regarding competitive pressures.

"Future expectations dipped to the lowest since February, highlighting concerns regarding the sustainability of the economic upturn,” said Pollyanna De Lima, economist at Markit and author of the report.

However, India remains a leading performer within emerging markets at a time when many of its peers are struggling, the economist said.

Data released earlier this month showed the manufacturing output had recovered to some extent, rising to 51.7 in June from 50.7 in May, mainly on the back of rising new business. This has resulted in pushing up of the Composite PMI Output Index to 51.1 in June from 50.9 in May. There are  not many official lead indicators of  services that come before gross domestic product data. As such, it becomes  difficult to compare PMI services  with official data. The government aims  at  an economic growth of  seven-7.75 per cent this financial year, against 7.6 per cent in 2015-16.