Economists advise caution in interpreting PMI numbers.
In a clear sign the country is already in the midst of a sharper than expected economic slowdown, India’s private sector service activities contracted in September for the first time in over two years, bringing it to the level witnessed during the global financial crisis.
The services sector, which contributes the most to India’s GDP, shrank as new business growth weakened and confidence level fell amid a fragile global economic recovery. (Click here for graphs)
According to the widely tracked HSBC Purchasing Managers’ Index (PMI), the services sector index fell to 49.8 points in September from 53.8 in the previous month. Fifty is the point that separates contraction (below 50) from growth (above 50). This bodes ill for India’s economic growth, as over 60 per cent of economic value added in the country, or GDP, is driven by services like banking, construction and telecom. Already, GDP figures for the quarter ended June indicated a sharp moderation in growth, down to 7.7 per cent, with many analysts revising the fiscal year 2011-12 growth down to 7-7.5 per cent.
Here it should be noted that PMI is based on a survey of around 500 private firms and gives a broad indication of economic activities. However, it should not be taken as if services activities were contracting in India, even though growth might come down, cautioned economists.
“There are other parameters which corroborate PMI for manufacturing. But, there are no other parameters that corroborate PMI for services in September,” the Prime Minister’s Economic Advisory Council chairman C Rangarajan said. He advised caution in interpreting the numbers.
Harsh Mariwala, chairman & MD, Marico, also the president of Ficci, said: “These are signals that growth is moderating. I think the reforms process has to be kick-started to improve the overall environment and restore confidence.
This will go a long way in improving sentiment.”
Financial information firm Markit Economics, which compiles the data, attributed the contraction in activities to weaker new business growth and shaky confidence level. Levels of outstanding business at Indian service companies increased for a third month running in September, Markit Economics said, adding the rate of accumulation was, however, marginal. PMI for manufacturing came close to contraction at 50.4 points in September, the weakest since March 2009. It stood at 52.6 points in August.
In fact, as Rangarajan said, other parameters also pointed to a slowdown in manufacturing growth. According to India's official figures, eight core industries grew at the slowest pace in 11 months at 3.5 per cent in August 2011, down more than half of their highest growth in a year at 7.8 per cent in July.
Already, industrial growth plummeted to a 21-month low of 3.3 per cent in July and that too when the core sector performed well. Within industry, manufacturing growth fell to just 2.3 per cent in July.
However, official figures for services for July, August and September are not out. In the first quarter of this fiscal, services grew by 8.89 per cent compared to 10.07 per cent in the corresponding period last year. Niranjan Hiranandani, managing director, Hiranandani Constructions, said, "No doubt, there is a slowdown in the economy. The Reserve Bank has desired the economy should slow down and hiked rates to cool off the economy, but it led to unemployment in the country. I do not think the slowdown will deepen further as many sectors such as agriculture have done well. But, RBI’s reading is different.”
J C Sharma, managing director, Sobha Developers, said the situation could not get worse. "Both Inflation and interest rates have peaked. By the time the next Budget is presented, things will stabilise. More things are falling in place, the effect of which you will see in the next two-three quarters," he said.
Together with manufacturing, PMI in services dragged down the composite index for India to 50.2 points in September, fractionally above the 50 threshold. Down from August’s 54.5, the headline index decreased to the greatest extent since November 2008, which was almost the peak of the global financial crisis. Leif Eskesen, chief economist for India & ASEAN at HSBC, said, “The slowdown in growth has continued to broaden with the services sector seeing a further slowdown in economic momentum, especially for financial intermediation."
