Slowdown in services sector may compel the RBI to rethink policy tightening.
The slowdown in the manufacturing industry seems to have started affecting the services sector as well. From 53.4 in August, the HSBC Markit India services Purchasing Managers’ Index (PMI) slipped to 49.8 in September. For the first time since 2009, the services PMI has dropped below 50. While a level of 50 or above indicates expansion, a number below that signifies a contraction in activities.
Such a spillover is expected when the manufacturing momentum and, consequently, the real economy slows sequentially, as seen over the last few months. While the moderation isn’t very sharp, it is clearly not as robust as the first quarter, says Shubhada Rao, chief economist, YES Bank , expecting further softening in the second half of this year, taking services sector growth below 10 per cent in FY12. However, she believes it is unlikely to slip below nine per cent, as there is still enough momentum. Clearly, belying the central bank’s concerns, the monetary policy transmission is having its desired action.
The slowdown is significant, given the services sector makes up 58 per cent of the GDP and the has remained robust for a long time, says Crisil’s Chief Economist D K Joshi. Therefore, one can expect a moderation in the GDP outlook, he adds. HSBC forecasts FY12 GDP below consensus, at 7.4 per cent. However, it asserts that robust private credit growth and tax collections do not indicate a bigger collapse.
Sector-wise, while the slowdown was marked in the financial intermediation space, business activity was higher in hotels and restaurants. Rao also sees some softening in technology on fragile global economic outlook, even as it is balanced by the depreciating rupee. Transportation has also slowed and communication, while showing fairly robust growth so far, could see some peripheral impact of the recently announced tariff increases. Government-related services could also slow, as the widening fiscal deficit could spur spending cuts. Although the third-quarter festive season is traditionally strong, the real estate sector could slow in the fourth quarter of this financial year.
After this reading, the opinion on upcoming policy action is still mixed. Rao believes inflation should soften incrementally and given the nebulous global economic situation, the Reserve Bank of India will pause its rate increases. However, Leif Lybecker Eskesen, HSBC’s chief economist for India and Asean, points out that while input costs and prices charged grew at a slower pace, they rose much faster than the historical average. This suggests that inflationary pressures remain firm and, therefore, HSBC expects another 25-basis-points increase this year unless the global situation worsens.