Services PMI rises to over a decade high in Oct even as input costs rise

Activity in services, the biggest sector of India's economy, accelerated to a ten and a half-year high in October despite companies increasing the prices of their products due to expensive raw materials, showed IHS Markit Purchasing Mmanagers' Index (PMI) survey. Unlike their manufacturing counterparts, service companies hired more hands even as the rate of employment generation remained modest.

The index rose to 58.4 in October from 55.2 in September, clearly indicating that the third quarter of the current financial year may witness high economic growth.

According to respondents, ongoing improvements in demand boosted growth of sales and subsequently output. New work intake increased at a sharp and accelerated rate, the strongest since July 2011.

Companies linked sales growth to better underlying demand and successful marketing.

Firms were able to secure a healthy intake of new work despite charging more for their services. Output prices rose at a solid rate that was the strongest since July 2017. Anecdotal evidence suggests that additional cost burden was passed on to clients. The rate of inflation was at a six-month high and outpaced its long-run average. Companies cited higher fuel, material, retail, staff and transport costs.

Companies expressed concern over the impact of inflationary pressures on recovery, dampening their sentiments.

Pollyanna De Lima, economics associate director at IHS Markit, said," A substantial rise in prices charged for the provision of services in India had no detrimental impact on demand... Business confidence remained subdued in the context of historical data."

Services companies continued to hire additional workers in October. Although moderate, the pace of job creation quickened from September to the strongest since February 2020.

"Hence, the recovery of the sector entered its third straight month, with firms scaling up activity at the fastest pace in ten-and a-half years and creating more jobs," Lima said.

The data, however, continued to point to weak international demand for Indian services. New export business decreased in October, a trend that has been recorded since the Covid-19 outbreak. Despite being solid, the rate of contraction was the weakest since March.

Since PMI manufacturing was also at an 8-month high in October, the Composite PMI Output Index rose from 55.3 in September to 58.7, signalling the strongest monthly expansion since January 2012.