Services PMI growth slows down: Is the demand in the sector fading?

Input cost inflation quickens to fastest since November 2017

India’s main services index expanded in August at the slowest pace in three months, signalling that demand may be cooling in the country’s dominant sector.

The seasonally adjusted Nikkei India Services Index fell to 51.5 in August from a 21-month peak of 54.2 in July, mirroring the weaker growth in both the manufacturing and services gauges. That was the lowest reading since May and showed both new orders as well as employment slowed from July levels. A reading above 50 signals expansion while less than that shows a contraction.

The services sector accounts for about 55 per cent of India’s gross domestic product.

More worryingly for the Reserve Bank of India, input cost inflation rose to its highest in nine months. The RBI is of the view that companies are passing on higher input costs to consumers and that is partly fanning inflation.

“Input cost inflation in the service sector accelerated to the sharpest since November 2017, fuelled by higher oil-related prices,” said Aashna Dodhia, an economist at IHS Markit. “Meanwhile, firms faced pressure on their margins as they were unable to fully pass on higher cost burdens to price-sensitive customers.”