Business activity returns to growth in July: Nikkei India Services PMI

Nikkei India Composite PMI Output Index climbed to 52.0 in July 2015 from 49.2 in June 2015

After having fallen in the previous month, output across the combined manufacturing and service sectors in India rose during July. The seasonally adjusted Nikkei India Composite PMI Output Index climbed to 52.0 from 49.2 in June to signal a modest increase in activity. Growth has now been recorded in 14 of the past 15 months. The return to expansion was helped by a first rise in services activity in three months and an acceleration in the rate of manufacturing production growth.

The seasonally adjusted Nikkei Services Business Activity Index rose back above the 50.0 no-change mark in July, posting 50.8 from 47.7 in June. That said, the rate of expansion was only marginal.

Services activity rose primarily in response to a renewed increase in new business, with panellists commenting on strengthening demand conditions. Although growing for the first time in three months, the expansion in new business was slight. Meanwhile, manufacturing new orders rose at a faster pace, helping support a return to expansion at the composite level.

The upturn in incoming new work led Indian service providers to take on additional workers in July. Although slight, the rate of job creation was the quickest in two years. While contrasting with continued marginal job shedding in the manufacturing sector, the rise in services employment was enough to result in higher staffing levels overall.

Increased employment led services outstanding business to decline for the first time since February 2014. However, composite work-in-hand increased fractionally due to a faster accumulation at manufacturing firms.

Rates of cost inflation accelerated across both monitored sectors in July. However, input prices still rose only modestly overall. There were reports from services panellists that fuel, transportation and staff salaries had contributed to the latest increase in cost burdens.

Services output prices rose, extending the current sequence of charge inflation to eight months. Nonetheless, the latest increase was only marginal. Anecdotal evidence suggested that strong competitive pressures had weighed on service providers' pricing power. Meanwhile, manufacturing selling prices were unchanged, ending a two-month period of inflation.

Confidence among Indian services firms deteriorated in July. Although companies remained optimistic (on average), the level of positive sentiment dipped to a survey low. Survey participants commented on marketing strategies, favourable government policies and upcoming new project starts as factors expected to support activity growth over the next 12 months. However, there are concerns surrounding future economic conditions and competitive pressures.

Commenting on the Indian Services PMI survey data, Andrew Harker, senior economist at Markit, which compiles the survey, said: While it was welcome news to see a return to growth of activity in the Indian service sector during July, we are still looking at a modest improvement at best. The same could also be said for employment, which increased at the fastest pace for two years, but only slightly. Moreover, uncertainty around the future path of the economy has led confidence to slip to a record low.

"Inflationary pressures remained muted during the month, with companies actually raising their output prices at a slower pace than in June.

"When looking at the manufacturing and service sectors together, weak inflationary pressures and modest growth tend to support a more accommodative monetary policy environment."

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