Slump continues in services PMI

Declines for eighth month in a row in February; trend at variance with official GDP data

Activity in the largest segment of the economy – services – contracted for an eighth straight month in February due to weak orders, the widely-tracked HSBC Purchasing Managers’ Index (PMI) showed.

However, the downturn in the output eased in February as the PMI for services stood at 48.4 points, up from 48.3 points in January. A reading below 50 points indicates contraction.

A commentary associated with the survey attributed the contraction in services to ‘economic instability’ and saw no chances of a recovery in the coming months due to expenditure compression to contain the Centre’s fiscal deficit to the targeted level.

On Monday, data had shown manufacturing PMI had risen to a year’s high in February.  The PMI data threw up results that are at variance with the official GDP figures. For the third quarter of 2013-14, it was manufacturing which pulled down GDP growth to 4.7 per cent against 4.8 per cent in the second quarter. On the other hand, it was services sector, primarily financial services, which grew 12.5 per cent, that gave a boost to the overall economic growth.

According to official estimates released on Friday, expansion in the services sector picked up to 7.6 per cent in the October-December period, compared with 5.9 per cent in the previous quarter. Manufacturing, on the other hand, declined 1.9 per cent compared to one per cent growth.

The difference in a trend shown by PMI and official figures may be because PMI is a survey of some 350 private sector companies, while GDP is actual data. Also, GDP is calculated year-on-year and PMI is measured month-on-month.

“PMI is just a survey and criteria is different for PMI and official GDP. Moreover, PMI covers only the private sector. Whereas we see a positive trend in PMI for manufacturing sector, official estimates do not reflect the same. The two of them are not rhyming and there is no sign of recovery,” said Madan Sabnavis, chief economist at CARE Ratings.

Leif Eskesen, chief economist for India and Asean at HSBC, said: “Service sector activity continued to stabilise, but the PMI reading remains below the water line and points to weak growth conditions.”

A decline in output was merely because of “economic instability” and a “decline in lower levels of incoming new work.” There was a fall in the business activity in four out of six sub-sectors of services.

Eskesen was not hopeful of a recovery in the coming months in the services sector. “Fiscal policy tightening to meet the deficit target will hold back government spending. This suggests growth will remain subdued in coming months.”

Finance Minister P Chidambaram drastically cut Plan expenditure to rein in fiscal deficit at 4.6 per cent of the GDP in 2013-14 compared to Budget estimates of 4.8 per cent. For the next financial year, fiscal deficit is pegged at 4.1 per cent, lower than even the 4.2 per cent targeted by the financial consolidation road map. The combined output in the private sector, however, rose for the first time in the past eight months in February.

The composite index, which includes both manufacturing and services sector reading, showed growth as it stood at 50.3 points from 49.6 points in the previous month.

Incoming new business was also on the decline in February in the services sector. “Panellists (involved in the survey) reported weaker demand, a fragile economy and competitive pressures,” said Markit Economics, a financial firm which compiles the PMI survey.