Services PMI contracts for 2nd month in a row

Signals deceleration in Q3 GDP

The services sector contracted for the second month in a row in December as cash crunch due to demonetisation took its toll on the biggest part of India’s economy. 

With manufacturing also declining in December and its growth decelerating in the previous two months, the combined activities in the two sectors fell in these two months, signalling that GDP growth in the third quarter may come down. The combined activities declined the steepest in three years. The Nikkei India Services Purchasing Managers’ Index (PMI) stood at 46.8 in December, compared to 46.7 in November. 

A reading below 50 shows contraction and the one above it denotes expansion. The downturn was broad-based by sub-sectors, with hotels and restaurants being the worst performers, according to Markit Economics, compiler of the data. 

“The Indian service economy ended 2016 on a grim note, with the average PMI activity index reading for the October-December quarter being the lowest since early 2014,” said Pollyanna De Lima, economist at IHS Markit and author of the report.

The composite PMI Output Index recorded 47.6 in December, compared to 49.1 in November. “Combined with the manufacturing PMI, data suggest that Indian GDP is set to grow in Q3 2016-17, but a slowdown is likely,” Lima added.  The government will release the advance estimates for 2016-17 later this week. However, PMI may not be factored into this as the index is not official data but a broad gauge of the economy. 

In spite of higher backlogs, service providers made cutbacks to staffing levels during December. That said, the drop in employment was only fractional, thereby continuing a trend of broadly stagnant work forces that was evident throughout 2016. A similar trend of fractional job losses was seen among goods producers. 

Indian services providers signalled optimism on the 12-month outlook during December although the level of optimism has fallen to the third-lowest in 11 years of data collection, the survey said.

“Of concern, business confidence among service providers plunged to one of the lowest in the series’ 11-year history, suggesting that an imminent rebound from the rupee demonetisation downturn is unlikely,” Lima said. 

Although there are expectations of a rebound in demand in the coming 12 months, worries toward the speed of the recovery following the cash recall hampered confidence, Markit Economics said.