Service sector shrinks for second straight month, PMI falls to 49.2 in Oct

India’s service sector, the dominating area of economy, shrank for the second straight month in October due to subdued demand conditions, particularly in finance and real estate companies, showed widely tracked purchasing managers’ index (PMI). 

PMI fell to 49.2 in October from 48.7 in September. In PMI parlance, the reading below 50 denotes contraction and the one above 50 means expansion. This was the first back-to-back reduction since the second quarter of 2017-18. 

The data showed that the rate of deceleration also declined in October from September, providing a ray of hope in these times of slowdown. 

An earlier data showed that manufacturing PMI also fell to a two-year low of 50.6 in October, from 51.4 in the previous month, private sector activity decreased for the second straight month in October. The composite PMI fell from 49.8 in September to 49.6 in October, signaling a marginal rate of reduction overall.

In the service sector, anecdotal evidence highlighted subdued demand conditions, competitive pressures and a fragile economic situation, said a commentary associated with PMI survey. 

October data indicated that demand weakness was centred on the domestic market, with exporters posting an increase in international sales. That said, the upturn in external demand was modest and the slowest in four months. Total sales were broadly unchanged in October, after contracting in September for the first time in over a year and a half.

Sub-sector data indicated that finance & insurance and real estate & business services acted as the main drag on the service economy, where both business activity and sales contracted. Consumer service was the brightest spot, posting strong growth of output and new work. Companies that secured new work mentioned successful marketing efforts and new client wins, while those that noted lower sales commented on fierce competition for new business.

Service sector employment increased for the 26th month in a row. While a few firms took on extra staff, this was curbed by job shedding at other companies. One factor that restricted job creation was subdued confidence towards the 12-month outlook for business activity. The degree of optimism observed in October was among the weakest seen in the near 14-year survey history. A number of panelists were concerned about the possibility that challenging economic conditions will persist.

Pollyanna de Lima, principal economist at IHS Markit, said: “It’s somewhat worrying to see the Indian service sector stuck in contraction, as firms react to muted demand by lowering business activity. Perhaps even more concerning was the downward revision to future expectations, given the possible detrimental impact of subdued business confidence on investment and jobs.”