PMI data belie recovery hopes

Services PMI fell to 44.6 points in September, the lowest since March 2009

Services, the economy’s biggest sector, contracted in September for a third straight month, and at the steepest pace in a little over four years due to weak  orders, showed the widely-tracked HSBC Purchasing Managers’ Index (PMI), issued on Thursday.

The services PMI fell to 44.6 points in September from 47.6 in August. This is the lowest after March 2009, when it had stood at 43.7. A reading above 50 indicates expansion; below 50, a contraction.

Leif Eskesen, chief economist at HSBC for India and the Association of Southeast Asian Nations, said: "This was led by the sharpest contraction in new business since February 2009, driven by weaker order flows in renting & business activities, hotels & restaurants and financial intermediation."

This takes the average quarterly PMI in services to 46.7 points in the second quarter of 2013-14 against 52 points in the first quarter, the lowest since the last quarter of 2008-09. The finance ministry has pegged economic growth in this financial year’s second quarter as higher than the first one but the PMI data does not signal this. However, the index gives only a broad indication and official numbers might not correspond one-to-one  with the HSBC index. The reason is that PMI is a month-on-month variation, while official economic growth numbers are year-on-year changes. Besides, PMI is a survey, while government data on gross domestic product are actual numbers.   

The composite PMI, which takes into account both manufacturing and services, fell sharply to a four and a half year low of 46.1 points in September from 47.6 points in the previous month. "The latest reading was consistent with a sharp contraction in business activity and one that was the fastest since March 2009," said Markit Economics, a financial information firm which compiles the PMI data.

The manufacturing PMI, issued on Monday, although marginally up from the August, also contracted for a consecutive month. It stood at 49.6 points, from 48.5 in August. In August, for the first time since March 2009, both the services and manufacturing PMI contracted in the same month.

Some economists were sceptical. "This drastic fall is surprising. We saw that exports are picking up; pharmaceutical and information technology companies did better as a result of the rupee depreciation," said Anis Chakravarty, senior director, Deloitte India. He added the numbers could improve in the coming months, as a result.

The Prime Minister's Economic Advisory Council  has, among the three main sectors, forecast a reduction in the growth rate compared to 2012-13 in only one sector, services. It expects this sector to grow by 6.6 per cent in 2013-14 against 7.1 per cent in 2012-13. If services grows at this pace in the current financial year, it will be the lowest since 2000-01.

According to Markit Economics, five of the six sectors covered by the survey posted a lower output in September, the exception being posts and telecommunication.

“Incoming new work contracted sharply and at the quickest pace since February 2009, with panelists commenting on weaker demand and a difficult economic climate,” said the firm.

Business sentiment was also the weakest since February 2009. However, there was some optimism on output growth in the coming year.

Private sector firms cut their workforce numbers, the financial firm said. The decrease in employment was for the first time in 19 months.

There were also instances of rising prices in raw materials, fuel, food and transport costs. "Despite the weak growth backdrop, inflation readings held broadly steady. This, in turn, supports the Reserve Bank’s stepped-up efforts to better anchor inflation expectations,” said Eskesen.

RBI governor Raghuram Rajan, in the mid-quarter policy review, had stated that inflation remained a concern, due to which he had raised the repo rate by 25 basis points, to 7.5 per cent.