Services PMI rises to over a decade high of 58.4 in October

Inflation at six-month high keeps business confidence muted but companies generate highest employment since pre-Covid period of February 2020

Activities in services, the biggest sector in India’s economy, accelerated to a 10-and-a-half-year high in October. This comes even as companies increased prices of their final products due to costly raw materials, showed IHS Markit purchasing managers’ index (PMI) survey.

Unlike their manufacturing counterparts, services companies hired more hands, resulting in job generation reaching the highest level after the pre-Covid period of February 2020.

The index rose to 58.4 in October from 55.2 in September, which clearly signalled that the third quarter of the current fiscal year may witness high economic growth. PMI numbers, both for manufacturing and services, are the only crucial macroeconomic data that has come for October. 

Though GST collections of Rs 1.3 trillion are also for the month of October, those basically were for transactions carried out in September.

According to respondents of the PMI services survey, ongoing improvements in demand boosted growth of sales, and subsequently, output. New work intakes increased at an accelerated rate, the strongest since July 2011.

Companies linked sales growth to better underlying demand and successful marketing. Firms were able to secure a healthy intake of new work despite charging more for their services. Output prices rose at a solid rate that was the strongest since July 2017.

Anecdotal evidence suggested that additional cost burdens were passed on to clients. The rate of inflation was at a six-month high and outpaced its long-run average. Companies were concerned about the impact of inflationary pressure on recovery, thus dampening their sentiment.

However, Pollyanna De Lima, economics associate director at IHS Markit, said, “A substantial rise in prices charged for the provision of services in India had no detrimental impact on demand. Business confidence remained subdued in the context of historical data.”

The fact that companies were able to increase the selling price of their products indicated that demand has come back for the services sector.

Rahul Bajoria, chief India economist at Barclays, said, “The robust recovery likely signals strong pent-up demand of the domestic economy amid an ongoing festive season.”

Services companies continued to hire additional workers in October. Although moderate, the pace of job creation quickened from September to the strongest since February 2020.

“Recovery of the sector entered its third straight month, with firms scaling up activity at the fastest pace in 10 and a half years, creating more jobs,” said Lima.

The data, however, continued to point to weak international demand for Indian services. New export business decreased in October, a trend that was seen since the Covid-19 outbreak. The rate of contraction was the weakest since March.

Since PMI manufacturing was also at an eight-month high in October, the Composite PMI Output Index rose from 55.3 in September to 58.7, signalling the strongest monthly expansion since January 2012.

Bajoria said October marks the third month following the second Covid wave in which the services PMI exceeded the manufacturing PMI, reflecting a shift in sequential growth drivers.