Services sector, the dominating area of the country’s economy, shrank for the first time in 13 months in June, due to weak sales and high taxation, showed the widely-tracked Nikkei purchasing managers’ index (PMI).
PMI fell to 49.6 points in June, down from 50.2 in May due to broadly stagnant sales, showed the data, which came ahead of Economic Survey for FY19 and Union Budget for FY20.
In PMI parlance, a print above 50 means expansion, while a score below that denotes contraction.
“Services companies are hoping that some stimulus will boost demand in the coming months, translating into output growth, though confidence about the future also started to fade,” said Pollyanna de Lima, principal economist at IHS Markit.
While the Reserve Bank of India has already given a monetary stimulus, one has to watch the Budget to see if some kind of fiscal prop up comes or not.
Devendra Pant, chief economist at India Ratings, said ideally there is a case for stimulus when the economy is slowing down, but the fiscal space is limited this time around.
YES Bank Chief Economist Shubhada Rao said the FY20 Budget arithmetic will need to be based on substantial tax revenue shortfall in FY19 provisional numbers, but more importantly, it has to find resources to finance the farmer income support scheme (which since then has been expanded), along with a new pension scheme, while living up to the relief promised to small taxpayers in the Interim Budget.
All this, in an economy that is losing growth momentum, brings the tightrope walk of balancing growth with fiscal prudence to the fore, she said.
In the services sector, there was an outright contraction in business activity, which was prompted by broadly stagnant sales.
“It’s somewhat surprising to see some companies linking subdued demand to high tax rates, two years on from the GST implementation, with the hotel tax mentioned in particular,” Lima said.
To assist with their workloads, services companies took on additional staff in June. The latest rise in employment was the twenty-second in as many months, but the slowest over this period. Firms that refrained from hiring mentioned that workforce numbers were sufficient to cope with current workloads.
“The latest PMI results for India bring some concerns over the sustainability of the relatively robust growth rates seen at the start of the year, and the ability of companies to create jobs,” Lima said.
With earlier data showing that PMI for manufacturing also slowed down to 52.1 in the month from 52.7 in May, the composite PMI Output Index, which maps both manufacturing and services industry, fell from 51.7 in May to 50.8 in June — its lowest mark in over a year.
“Looking at the opening quarter of fiscal year 2019/20, we see the slowest upturn in private sector output since the last quarter of fiscal year 2017/18, which dragged employment growth down to a notable extent,” Lima said.