'Modi factor' pushes services PMI to 17-month high in June

New order flows, stronger sentiment due to release of pent-up demand

The upbeat mood caused by the Narendra Modi government lifted services, the biggest part of India’s economy, to a 17-month high in June, according to the HSBC Purchasing Managers’ Index (PMI).

The index rose to 54.4 points in June from 50.2 points in the previous month. That was the biggest monthly rise in the index in four years, said Reuters. Before May, the services PMI had been stuck below 50, which divides growth from contraction, for almost a year.

In May, the PMI was slightly into the expansion mode. Ten consecutive months prior to that had witnessed contraction.

“After months of subdued activity, the Modi wave has struck the services sector and lifted growth to a 17-month high,” said Frederic Neumann, co-head of Asian Economic Research at HSBC, adding that new business flows and stronger business sentiment supported the rise. Some of this was simply pent-up demand being unleashed, he said, and faster reforms thanks to political stability would fuel the momentum.

Neumann said the insurgency problem in West Asia was a matter of concern. “Be sure to expect some bumps along the way, as tensions in the Middle East and the absence of monsoon clouds play spoilsport.”

As manufacturing PMI rose to 51.5 points in June from 51.4 points in the previous month, HSBC India Composite Output Index jumped to a 16-month high of 53.8 in June from 50.7 in the previous month.

The services index averaged 51.1 in the second quarter of the year, an improvement from the first quarter’s average of 48.2 and the highest quarterly reading since the second quarter of 2013. Respondents to the survey pointed to stronger new business inflows and better economic conditions.

Output expanded in four of the six monitored categories. Among the sectors that saw the fastest rises were post and telecommunications, and tenting business.

Incoming new orders in the services sector increased for the second consecutive month in June. This was linked to improved underlying demand. New work intakes across the private sector as a whole also expanded at the strongest rate since February.

However, employment in the services sector remained broadly unchanged in June compared to May.

Confidence regarding output levels in the coming year remained positive in June, with optimism at its strongest since May 2013.

The end of elections, planned increases in marketing budgets, forecasts of stronger demand and ongoing improvements in India’s economy were the factors cited by survey respondents as opportunities for activity growth over the next 12 months.

Services players faced higher input costs due to greater fuel tariff and other charges. This was partly shifted on to consumers.

The PMI is based on a survey of some 350 private companies in the services sector.

PMI Services

April 13	May 13	June 13	July 13	Aug 13	Sept 13	Oct 13	Nov 13	Dec 13	Jan 14	Feb 14	March 14	April 14	May 14	June 14
50.7	53.6	51.7	47.9	47.6	44.6	47.1	47.2	46.7	48.3	48.4	47.5	48.5	50.2	54.4
Note: Reading above 50 shows expansion, the one below that score is contraction
Source: Markit Economics