Nikkei India Services PMI declines for second straight month in August 2017

India services stuck in contraction territory: Nikkei India Services PMI

The Indian service sector was again impacted by the goods and services tax (GST) during August as a second consecutive drop in new business resulted in another monthly decline in activity. The downturn was less severe than in July, however, with rates of contraction softening in both cases. Jobs were shed, due to fewer workloads, and backlogs were accumulated. A slightly quicker rise in cost burdens was registered, whereas output charge inflation softened from July's recent peak. Companies remained optimistic towards growth prospects, though overall sentiment fell.

Registering 47.5 in August, the seasonally adjusted Nikkei India Services PMI Business Activity Index pointed to a second successive decline in output. Rising from 45.9 in July, however, the latest figure was indicative of a softer rate of reduction that was moderate overall. The downturn was often associated with the implementation of the GST, though there were also mentions of shortages of inputs.

Although manufacturing production rebounded from July's downturn, growth was insufficient to offset the contraction in services activity. Private sector output subsequently declined again. However, rising from July's 100-month low of 46.0 to 49.0 in August, the seasonally adjusted Nikkei India Composite PMI Output Index was consistent with a weaker pace of reduction that was only slight.

The trend for services activity mirrored that for new business, which decreased for the second month in a row but at a slower rate. Where a reduction was noted, panellists commented on subdued demand, competitive pressures and the GST. In contrast, factory orders returned to expansion territory in August.

Although service providers retained an optimistic view towards the year-ahead outlook for activity, overall sentiment decreased in August. Survey participants indicated that the new taxation system and advertising campaigns are anticipated to support growth, but there were worries about competitive pressures. Similarly, goods producers were less upbeat than in July.

Price indicators continued to point to relatively muted inflationary pressures in the service sector. Input costs rose at a quicker rate in August, though one that was well below its long-run average. At the same time, output charge inflation softened from July's 53-month peak. Companies reported having paid more for beverages, food, fuel and paper and passing on to consumers only part of the additional cost burden. In the manufacturing industry, purchase prices increased at the slowest pace in one year. Whereas charges were raised, the rate of inflation was only marginal.

Meanwhile, service providers indicated that outstanding business volumes rose due to delayed payments from clients. Despite being modest, the rise in backlogs was the most pronounced since February. Across the private sector as a whole, work-in-hand increased to the greatest extent since February.

Finally, payroll numbers in the service economy decreased in August amid evidence of the non-replacement of voluntary leavers. The decline in employment was the second in successive months, but job shedding eased to a marginal pace as the vast majority of service providers left headcounts unchanged. Conversely, manufacturers took on extra staff at the quickest rate in nearly four-and-a-half years.

Commenting on the Indian Services PMI survey data, Pollyanna De Lima, Principal Economist at IHS Markit, and author of the report, said: "Services acted as a drag on the private sector economy in August, with the reduction in business activity offsetting growth of manufacturing production. While July's downturn in the goods-producing industry proved to be a temporary blip, services remained trapped in contraction.

"The underlying trend for services is one of uncertainty. Businesses are holding back on investment, leading to falls in employment. At the same time, input costs are increasing and firms are unable to fully pass these on due to competitive pressures. Its not all doom and gloom, however, as activity, new business and employment showed much slower rates of reduction than those noted in the prior survey period."

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