The finance ministry's hopes of economic growth in the second half being better than that in the first may be coming true. Signs of slightly stronger economic growth are now becoming more discernible, at least for the last quarter of the current financial year.
After the robust HSBC purchasing managers index (PMI) for manufacturing, services also followed the trend, growing at the fastest pace in six months in January. Manufacturing and services together account for over 80 per cent of the Indian economy.
Services PMI for January rose to 58 points from 54.2 in December, owing to a rise in output and faster flow of new businesses. Together with robust PMI manufacturing, this raised the composite index for both services and the secondary sector to 59.6 points in January from 54.7 points in the previous month. This was the highest pace of growth in nine months.
Fifty is the threshold between expansion and contraction. After contracting in September and October, services expanded for the third month.
According to Leif Eskesen, chief economist for India & ASEAN, HSBC, services sector activity in January rebounded at the fastest pace since July, led by the financial intermediation and hotels & restaurant sub-sectors. New businesses also flowed in at a faster pace. "This helped boost the sentiment among service sector companies on the 12 months ahead," he said.
The growth in new business was the fastest since April, indicating an improvement in demand and market conditions. Backlogs at work were subdued, while the employment scenario was largely unchanged. This showed companies had adequate resources to meet the recent rises in new business.
"The rebound in activity and the continued increase in employment kept backlogs of work in check," said Eskesen.
While India Inc has its hopes pinned on a repo rate cut in the next policy review, Eskesen maintained the time was not ripe for a rate cut. The input price inflation was the weakest in three months. However, Eskesen said sequential inflation remained high by historical standards, and prices continued to rise. "Combined with the uptick in the manufacturing PMI, these numbers suggest it's premature for RBI (Reserve Bank of India) to cut policy rates and it would have to await for evidence of a significant and sustained decline in inflation and/or further materialisation of downside risks to growth," he said.
Wholesale price index-based inflation has recently been declining. It fell to 7.47 per cent in December, after remaining at over nine per cent for a year. Food inflation data showed deflation for the fourth consecutive week during the week ended January 14, before the government discontinued releasing weekly data.
The degree of positive sentiment was the highest since July and in January, service providers were optimistic of business activity increasing over the next year.
Going forward, growth is expected to be supported by improving market conditions and a rise in promotional activity, according to Markit Economics, which compiles PMI data.
India's economic growth declined to 7.3 per cent in the first half of this financial year from 8.6 per cent in the corresponding period of the previous one, hit hard by RBI's tight monetary policy and the uncertain global environment.
Analysts are, however, unsure whether the second half would give better growth results than those seen in the first. However the finance ministry, as well as economists are hopeful that the last quarter of this financial year would show stronger growth compared to that in the previous ones. All eyes are now on the advance estimates for 2011-12, slated to be released on February 7.
