Services PMI at 42-month high in August

But firms cut work force slightly

Services, the dominating sector of India's economy, grew by over 3-1/2-year-high due to strong incoming new work, showed the widely-tracked Nikkei purchasing managers' index (PMI) survey. Even then, service firms reduced hiring of workers marginally.

The data came five days after official gross domestic product (GDP) numbers showed range-bound growth in services, except for the ones boosted by government expenditure in the first quarter of 2016-17 compared to expansion in the corresponding quarter of the previous year.

PMI rose to 54.7 points in August, up from 51.9 in July. A reading above 50 points shows expansion, while a reading below that mark means contraction. The services index has now signalled expansion in each of the past 14 months.

 

Output grew in five of the six monitored categories, the exception being hotels and restaurants.

In official GDP data as well, hotels and restaurants rose marginally in the first quarter of the current financial year. The private corporate sector growth in the hotels and restaurant sector was just 3.1 per cent during Q1 of 2016-17 and that too in current prices.

As PMI manufacturing was also at a 13-month high in August, the composite PMI Output Index climbed from 52.4 in July to a 42-month high of 54.6 in August, highlighting a stronger improvement in private sector economic activity.

However, August saw no change in the level of Indian private sector employment, as a slight increase at manufacturers offset a mild fall at service providers. The latter registered the first decline in 11 months, but the rate of job shedding was only slight.

Decreases in staffing levels were signalled across the financial intermediation, hotels & restaurants, post & telecommunications, renting & business activities, and transport & storage categories. However, rates of job losses were negligible in all of these categories.

Pollyanna De Lima, economist at IHS Markit and author of the report, said, “The numbers of in-house staff fell, however, as firms remained somewhat uncertain regarding the sustainability of the upturn in demand."

However, the economist said a further uptick in backlogs – the sharpest in nearly two years – may lead service providers to create jobs in coming months.

The PMI survey showed that the level of incoming new work rose at the quickest pace for three-and-a-half years. Where an expansion was registered, companies mainly linked this to improved market conditions.

Stronger growth of business activity and incoming new work led to a modest recovery in optimism at service providers. Over 27 per cent of companies expected activity to increase over the coming year, compared to one per cent that forecast lower output volumes.

Business confidence was linked to greater client interest and improved market conditions. Although the degree of positive sentiment rose to its highest since the start of 2015, it should be noted that it remained below its long-run survey average.

Price pressures in the service sector remained subdued in August. Average costs declined marginally for the second successive month, which firms attributed to lower diesel, fuel and vegetable prices. Meanwhile, average service charges ticked higher, following a slight decrease in the prior survey month.

Latest survey data pointed to additional pressure on the capacity of private sector companies in India as outstanding business rose at manufacturers and service providers alike. Rates of accumulation were at 32- and 22-month highs, respectively.