Services sector contracts for fifth straight month

Wait for significant turnaround in economy might get prolonged

In November, India’s services sector, which accounts for the biggest chunk of its economy, shrank for the fifth consecutive month, according to the widely-tracked HSBC Purchasing Managers’ Index (PMI) released on Wednesday.

Services PMI inched rose to 47.2 points in November from 47.1 in October. A PMI reading of more than 50 points means expansion, while a reading below 50 shows contraction.

“This indicated a solid rate of output contraction across the Indian services economy,” said Markit Economics, which compiled the data. This may dash hopes of a significant recovery in the second half of this financial year, especially in the services sector, which expanded 5.7 per cent in the second quarter of 2013-14, the least in 12 years, according to official data on gross domestic product. For the quarter ended June, the sector expanded 6.2 per cent, while in the year-ago period, it expanded 7.1 per cent. The services sector contributes the most to India’s GDP, which grew at sub-five per cent levels for the fourth consecutive quarter during the second quarter of 2013-14.

In November, five of the six segments in the services sector considered by PMI showed contraction, post and telecommunications being the exception. For the third consecutive month, the sharpest fall was seen in the case of the hotels and restaurants segment, clearly showing consumers were postponing their luxury expenditure due to the high inflation.

Combined with manufacturing PMI, data for which were released on Monday, the composite index (manufacturing and services) rose to 48.5 points in November from 47.5 in October. For November, PMI for manufacturing stood at 51.3, against 49.6 in October.

HSBC chief economist for India Leif Eskesen said, “The continued contraction in services sector activity is a testament to the dampening effects of the heightened macroeconomic uncertainty, which is making businesses and consumers more cautious about spending.”

Output in the services sector fell for the fourth consecutive month. The composite PMI captures not just output, but also other aspects such as the confidence of India Inc.

The low private sector output mirrored a fall in new business flows. Anecdotal evidence indicated falling client confidence, economic instability, competitive pressures and Cyclone Phailin had contributed to the drop in new work. For the second straight month, all the six services sub-sectors recorded a fall in new business volumes. The steepest decline was recorded in the hotels and restaurants segments.

Now, a significant revival in GDP growth looks unlikely, though the government hopes the second half of 2013-14 will see a boost in the economy and GDP growth for the entire financial year will stand at five per cent. Eskesen said, “While activity readings may be stabilising, a notable recovery is not in the cards for a while still.”

However, in the November PMI survey, India Inc’s optimism about output growth in the coming year was sustained. Panellists expect the launch of new services, planned increases in marketing budgets and forecasts of better economic conditions to support demand growth next year.

In November, input costs in the private sector rose the most in 16 months, while charge inflation rose to a seven-month high. These were driven by steep rises in the manufacturing sector; for services companies, input and output price inflation remained unchanged.

Eskesen said the Reserve Bank of India (RBI) was likely to continue to focus on containing inflation at its policy review later this month. “Despite the weak growth backdrop, RBI has to keep its inflation guard up to address the lingering inflation pressures.”