GST hits services in August too over slow demand, higher costs

However, the decline was softer than in July, when the PMI had plunged to a nearly four-year low

Introduction of the nationwide goods and services tax (GST) continued to be a drag on activity in the services sector in August, for a second month, with companies having to handle higher input prices and slow demand.

The widely-tracked Nikkei Purchasing Managers’ Index (PMI)  showed a reading for the services sector of 47.5 in August. The 50-point mark separates expansion from contraction. However, the decline was softer than in the previous month of July, when the PMI had plunged to a nearly four-year low of 45.9. 

Last week, the latest gross domestic product (GDP) data showed a three-year plunge in economic growth at 5.7 per cent in the first quarter of the current financial year.

While PMI data for manufacturing rebounded in August, rising to 51.2 points from 47.9 in July, services' providers continued to grapple with a slowdown in new businesses. The entities surveyed blame this on subdued demand and rising competitive pressures emanating from GST.

 “The tax rates under GST for a number of services have increased. More companies are affected by this, as compliance has also gone up,” said Aditi Nayar, principal economist at ratings agency ICRA. 

The  slowing in services could also be attributed to the fact that some of the major segments within the sector such as banking, telecom and information technology are dealing with unique sets of issues, she added.

The PMI survey for July showed output and new work had started declining for the first time since January. Likewise, factory orders had decreased in July, at the quickest pace since February 2009.

As a result of these trends, the labour market continued to be adversely affected, with employment continuing to decline, albeit marginally, for a second month. However, job shedding is expected to ease to a marginal pace, as the vast majority of service providers have left headcounts unchanged. 

“The underlying trend for services is of uncertainty. Businesses are holding back on investment, leading to falls in employment,” said Pollyanna De Lima, principal economist at IHS Markit, which compiles the data, and author of the report. 

Interestingly, manufacturers took on extra staff at the quickest rate in nearly four and a half years in August.

On the price front, input cost inflation rose at a quicker pace from July. Companies reported having paid more for beverages, food, fuel and paper. However, services' providers were able to pass on to consumers only a part of the additional cost burden.

While the option of input tax credit is available to service providers, the lag effect in recovering the sums is affecting the sector, said a Delhi-based economist.

On the other hand, the manufacturing industry has been witness to purchase prices increasing at the slowest pace in a year. Whereas charges were raised, the rate of inflation was marginal.

In services, output charge inflation softened from the 53-month peak it had reached in July. Since this was primarily the result of higher tax rates and salaries to staff, remunerations sagged in August.

Service providers also indicated that outstanding business volumes rose due to delayed payment from clients. Despite being modest, the rise in backlog was the most pronounced since February. Across the private sector as a whole, work-in-hand increased to the greatest extent since February, the PMI survey showed.

As a result of all this, the Nikkei India Composite PMI Output Index, which maps both the manufacturing and services sectors, rose from a 100-month low of 46 in July to 49 in August.