PMI shows gradual recovery in services, albeit not broad-based

PMI up in February after three months of contraction, lay-offs continue

The services sector, which is a dominating part of India's economy, may record a gradual recovery in the fourth quarter after it was hit hard by demonetisation in the third quarter, showed Nikkei's purchasing managers' index (PMI) survey. However, the services sector firms still laid off workforce in February as the recovery was fragile and not broad-based.

PMI for services rose to 50.3 points in February, which meant expansion, after three months of remaining below 50, which signified contraction.

PMI averaged 49.3 points in the third quarter of the current financial year, while it stood at 49.5 points in the first two months of the fourth quarter.

While the turnaround was seen in the business activity and inflows of new work in the financial intermediation, most other sectors saw declines in February. Nonetheless, rates of contraction softened in all cases.

It should be noted that financial, real estate and professional services growth slowed down sharply to 3.1 per cent in the third quarter of the current financial year against 7.6 per cent in the second quarter and 8.7 per cent in the first in the official gross domestic product (GDP) data.

If PMI provides lead indicators, then financial services might be showing a turnaround in the fourth quarter.

IHS Markit, compiler of the survey, said services companies continued to reduce payroll numbers.

Earlier PMI data had shown that manufacturing activities had inched up in February to 50.7 points from 50.3 points in the previous month. In December, PMI had contracted below 50 due to demonetisation.

"The upturn in services activity follows news from the sister PMI survey showing factory production growing for the second straight month in February," Pollyanna De Lima, economist at IHS Markit, and also the author of the report, said.

However, the year-ahead outlook for the services sector remained subdued. The survey participants were less optimistic about the 12-month outlook as firms were concerned about market competition and this muted sentiments reflected in the payroll numbers.

"It is still too early to state that expansion rates will climb to their trend levels in the near term. Companies remain reluctant to take on additional staff and confidence towards the 12-month outlook for output dipped to its second-lowest mark in over one year," Lima said adding that these factors indicate that, so far, firms are doubtful about the sustainability of the economic recovery.

Meanwhile, the Nikkei India Composite PMI Output Index -- that maps both the manufacturing as well as services sector -- rose from 49.4 in January to 50.7, pointing to the first increase in private sector activity across India since last October.

"With demand conditions strengthening in India, new business inflows rose in both sectors, leading to the first increases in private sector new work orders and output since October 2016. Nevertheless, growth rates were mild at best and far from their historical averages," Lima added.

On the prices front, input cost inflation accelerated and service providers also raised their charges so much so that "the increase in output charges was the first in five months and the most pronounced since mid-2016", the survey said.

The increase in prices may spoil the case for any immediate interest rate cut by the Reserve Bank of India (RBI).

The RBI in its policy review meet on February 8 kept key interest rate unchanged at 6.25 per cent and said it is awaiting more clarity on the inflation trend and impact of demonetisation on growth. The next meeting of the MPC is scheduled for April 5-6, 2017.