Services PMI returns to modest growth in July

After two months of consecutive contraction, services activities in the country rose in July, albeit marginally, as demand increased, showed a widely tracked Nikkei purchasing managers’ index (PMI). Quite ironically with the manufacturing sector, services firms still hired additional hands.

Inflationary pressures remained subdued, which prompted Markit Economics — a compiler of PMI — to suggest accommodative policy from the Reserve Bank of India (RBI), a day after the central bank refused to cut the key rate. However, the central bank had given sufficient hints of a cut, going forward.

PMI rose to 50.8 points in July as new business was forthcoming against 47.7 in June and 49.6 in May. The reading above 50 is growth, and the one below it, represents contraction.

“Although growing for the first time in three months, the expansion in new business was slight,” said Markit Economics.

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.

This was in contrast to continued marginal job shedding in the manufacturing sector, despite much more robust growth than that of services.

Manufacturing PMI rose to a six-month high at 52.7 points in July against 51.3 in June. As such, the composite PMI output climbed to 52 points in July from 49.2 in June, which had contracted for the first time in recent months.

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. Andrew Harker, senior economist at Markit, said, “It was welcome to see a return to growth of activity in the Indian service sector during July. We are looking at modest improvement at best.”

The rates of cost inflation accelerated in July. There were reports from services panelists that fuel, transportation and staff salaries had contributed to the latest increase in cost burden. 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. Inflation was muted at the manufacturing level as well, earlier data had shown.

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

Confidence among 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 growth over the next 12 months. However, there are concerns surrounding future economic conditions and competitive pressures.

"...uncertainty around the future path of the economy has led confidence to slip to a record low," the economist at Markit said, though he did not specifically mentioned to logjam between the government and the opposition on key pieces of legislation and Parliament proceedings.

PMI services is based on a survey of 350 private sector companies and gives a broad gauge of the economy.