May services sector growth fastest in seven months

Services PMI rises to 52.2 in May, up from 50.2 in April

Services, the dominating sector of the Indian economy, grew at the fastest rate in May since October 2016, more than neutralising the tepid rise in the manufacturing sector, according to the widely tracked Nikkei purchasing managers’ index (PMI) survey.

The sector also saw new jobs being created at the highest rate in almost four years, which cushioned the fall in the number of new jobs created in manufacturing. If growth in the services sector continued at this rate, the country’s economic growth would be higher in the first quarter of the current financial year than in the previous quarter, said the author of the report.

However, there were downside risks to the growth trajectory, the author said. India’s economy grew at least at a four-quarter low of 6.1 per cent in January-March 2017, due to the impact of demonetisation. Even then, the author expects the Reserve Bank of India (RBI) to cut the repo rate as underlying growth is still weak.

The PMI stood at 52.2, higher than the 50.2 seen in April. The 50-point mark separates expansion from contraction, indicating that the health of the sector continues to be positive.

This has been the fourth month of consecutive growth, after contraction in the previous three months due to the note ban.

A quicker rise in new business has pushed up services sector growth in May. As a result, both activity and employment saw a spike. “The pick-up in service sector growth seen mid-way through the first quarter suggests that gross domestic product could expand at a faster rate should growth momentum be maintained in June, though there are downside perils to this,” said Pollyanna De Lima, economist at IHS Markit and the author of the report. However, output growth was only marginal in May, even lower than the slow output growth seen in the manufacturing sector. 

The Nikkei India Composite PMI Output Index, which maps both the manufacturing and services sectors, managed to stay positive. It reached a seven-month high of 52.5 in May from the 51.3 seen in April.

“Cracks also appeared in the manufacturing sector, which outperformed services despite expansion rates for production and order books easing since April. Worries that this period of uninspiring growth may continue for some time might prompt the RBI to lower the benchmark rate in order to support the economy,” De Lima said.