Services growth in August at 2-yr low

The country’s services sector grew at the slowest pace in more than two years in August, on the back of the lagged effects of policy tightening by the central bank, high inflation and uncertainty over global economic recovery, according to the widely-tracked HSBC Purchasing Managers’ Index (PMI). The index for services fell to 53.8 points in August from 58.2 in the previous month. A reading above 50 points represents growth, and below that means contraction.

“The sequential growth rate in both business activity and new business decelerated markedly in response to the lagged effects of monetary policy tightening, the elevated level of inflation and the now heightened uncertainty about the global economic outlook,” said Leif Eskesen, Chief Economist for India & Asean at HSBC. The manufacturing sector’s growth in the same month, too, had fallen to 52.6 points, a 29-month low. Official figures say the services sector (excluding construction) expanded by 10 per cent in the first quarter of this financial year, only marginally down from 10.43 per cent in the year-ago period. The fall in services growth, along with manufacturing, pulled the composite index down to 54.5 points in the month from 57.9 in July. As a result, the composite index for both manufacturing and services growth fell to a 27-month low.

Despite the slower momentum in India’s services sector, backlog of work continued to increase. Inflation pressures remains firmly in place, with input costs increasing at a steady pace and prices charged accelerating. Eskesen said inflation remained the dominant concern, calling for a few more policy rate increases before RBI can call it quits.

RBI has already hiked policy rates 11 times since March 2010 and is widely expected to further raise them in its policy review later this month. The uncertainty over the global economic recovery was further accentuated when the European Commission recently reported that the business and consumer index hit a 15-month low in the Euro zone.

Manufacturing output in China continued to show a contraction, despite the index rising. It rose from 49.9 points in August from 49.3 points in the previous month, showing that manufacturing is moving towards flat growth, but is still contracting. PMI for services also fell to a series-record low of 50.6 points in August. As such, the composite index for Chinese manufacturing and services sectors remained at a 28-month low of 50.4 points as was the case in July.