PMI services drops to 3-month low in November as GST cools demand

Rising input costs likely to deter RBI from effecting any rate cut tomorrow

Services, the biggest sector of the Indian economy, contracted in November because of the goods and service tax affecting demand, shows the widely-tracked Nikkei purchasing managers’ index (PMI).

The PMI fell to 48.5 points in November from 51.7 in the previous month. The November reading is the lowest since August. A reading above 50 points denotes expansion and one below that is contraction. 

This implies that the country’s growth story will take time to pick up significantly after economic expansion did rise to 6.3 per cent in the second quarter from 5.7 per cent in the first one.

Even then, the Reserve Bank of India might not cut its policy rate on Wednesday because input prices are rising. However, the employment situation gave relief as jobs rose in the services sector.

“Business underperformance emanated from the GST, which contributed to sluggish demand and a lower customer turnout, according to anecdotal evidence,” said Aashna Dodhia, economist at IHS Markit and author of the report.

Despite unfavourable demand, service providers continued to add to their workforce numbers as business sentiment in the services sector for the next 12 months rose at the strongest pace since July.
 

The services PMI follows the manufacturing one, which showed robust growth during November.

Accordingly, the Nikkei Composite Output Index, which maps both manufacturing and services, fell from 51.3 in October to a three-month low of 50.3 in November, signalling broad stagnation in private sector output.

On prices, input cost inflation quickened to its fastest since October 2013, and, accordingly, service providers increased their average selling prices in November.

“That said, cost pressures further intensified at service firms (fastest inflation since October 2013), which could constrain output growth in the near term and reduce any central bank appetite to reduce interest rates,” Dodhia said.

Besides food and fuel costs, higher taxation led to an increase in overall input prices.
 

India Inc, however, is demanding interest rate cuts to further build on the positive sentiment generated by the rebound and upgrade of the country’s sovereign rating by Moody’s.

In its October review, it had kept the benchmark interest rates unchanged on fears of rising inflation rates while lowering the growth forecast to 6.7 per cent for the current fiscal year.
 

The central bank had reduced the benchmark lending rate by 0.25 percentage points to six per cent in August, bringing it to a six-year low.