Nikkei Services Business Activity Index declines from 53.7 in April to 51.0 in May 2016
Growth of services activity in India softened for the second straight month in May, as new business inflows expanded at the slowest rate since July 2015. Although some firms took on additional staff, the overall pace of job creation was fractional. Input costs rose again, leading to a further increase in prices charged. Although service providers remained optimistic that output will expand in the year ahead, the level of confidence was the lowest recorded since February.Falling from 53.7 in April to 51.0 in May, the seasonally adjusted Nikkei Services Business Activity Index pointed to a slight expansion in business activity that was the weakest since last November. Output rose in three of the six tracked categories, namely Transport & Storage, Post & Telecommunication and Financial Intermediation. The latter saw the strongest rate of increase.
Manufacturing production growth also eased, which combined with the slowdown in services resulted in a weaker increase in private sector output. The seasonally adjusted Nikkei India Composite PMI Output Index fell to a six-month low of 50.9 in May, from 52.8 in April.
Growth of new work at services firms eased for the second month running in May. Where new business inflows expanded, panellists reported aggressive marketing campaigns. Nonetheless, there were mentions that growth was restricted by increased competition and the assembly elections in some regions. Manufacturing order books increased at a quicker pace that was nonetheless modest.
There was ongoing evidence of spare capacity in the service sector, as unfinished business declined for the fourth successive month. Despite accelerating since April, the rate of backlog depletion was only moderate. Work-in-hand among goods producers also decreased.
Services staffing levels increased in May, following a stagnation in the prior month. But with only 1% of survey participants signalling higher payroll numbers, the overall rate of job creation was fractional. A marginal increase in manufacturing employment was also registered.
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Amid reports of higher petrol prices, average cost burdens facing service providers in India rose during May. The latest increase in input prices was the eighth in as many months, but the rate of inflation eased since April and was lower than its long-run average. Conversely, cost inflation at manufacturers accelerated to the fastest since March 2015.
Service providers attempted to improve margins by raising their selling prices again in May. As has been the case throughout the current six-month sequence of inflation, the rate of increase in charges was weaker than for costs. By comparison, factory gate prices increased for the third consecutive month, but at the slowest pace in this sequence.
Services companies expect output to increase over the coming 12 months, but the degree of optimism weakened to the lowest since February. Exactly 15% of firms forecast activity growth, citing favourable government policies, improved marketing strategies, business expansion plans and hopes of better demand conditions.
Commenting on the Indian Services PMI survey data, Pollyanna De Lima, economist at Markit, which compiles the survey, said: "Ongoing weakness in manufacturing and services was evident in May, with output growth losing momentum for a second straight month. Overall expansion across the two sectors was the lowest since last November, as was the case for new orders.
"Latest PMI numbers raise doubts about the effectiveness of economic and monetary policies. The gloomy growth picture will be a concern to policymakers and will raise the chances of further cuts to interest rates by the RBI. This would be supported by subdued inflationary pressures, with May data pointing to weaker increases in both costs and charges."
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