Service sector growth sustained in May 2019: Nikkei India Services PMI

Nikkei India Services Business Activity Index declines to 50.2 in May from 51.0 in April

Indian services activity increased to a weaker extent in May, as disruptions arising from the elections in the earlier part of the month hampered growth of new work intakes. However, there were signs that the slowdown may prove temporary as companies stepped up hiring and became more confident about future prospects. Firms were also helped by a lack of inflationary pressures in the sector.

The seasonally adjusted Nikkei India Services Business Activity Index fell to 50.2 in May, from 51.0 in April. The latest figure highlighted the slowest growth rate in the current 12-month stretch of expansion. Some firms suggested that output rose in tandem with ongoing sales growth, while competitive pressures and the elections reportedly curbed the upturn.

 

A resilient manufacturing industry acted to offset service sector weakness, as faster production growth meant that the upturn in private sector output steadied. The seasonally adjusted Nikkei India Composite PMI Output Index was at 51.7 in May, unchanged from April. The reading was indicative of a moderate pace of increase that was the joint-slowest since last September.

New business inflows at service providers increased at the slowest pace in eight months. Where growth was reported, survey members commented on successful advertising efforts. By comparison, factory orders expanded at a quicker pace in May.

The rise in total new work across the service economy was supported by strengthening demand from overseas. New export business increased for the third straight month and to the greatest extent in just under a year. Similarly, goods producers experienced a quicker expansion in international orders.

Services companies retained positive projections about the 12-month outlook for business activity. Expectations of favourable public policies, better demand conditions and planned marketing were among the reasons cited for optimism. Moreover, the overall level of sentiment improved in May and was among the highest seen over the past year.

This upbeat mood boosted hiring in the service economy, with employment having now increased for 21 months running. Furthermore, the rate of job creation was solid and faster than seen on average over the survey history. With factories also lifting headcounts, private sector jobs in India expanded at the fastest pace since February.

Another factor enabling services companies to take on extra staff was a lack of pressure on their expenses. Input costs did increase, but at the slowest rate in close to two-and-a-half years. With inflation also subdued in the manufacturing industry, aggregate input prices displayed the weakest rise in just under three years.

A marginal and softer rise in services fees was registered during May, with charge inflation much weaker than its long-run average. That said, for the second time in almost two years, the rate of increase in selling prices surpassed that seen for input costs. At the same time, factory gate charges were broadly unchanged from April.

Services companies indicated that delayed client payments prevented them from working on their outstanding business. Backlogs have increased throughout the past three years, though the accumulation recorded in May was the weakest since January. Concurrently, unfinished work among manufacturers was little changed from April.

Commenting on the Indian Services PMI survey data, Pollyanna De Lima, Principal Economist at IHS Markit, and author of the report, said, "India's dominant service economy again suffered the impacts of election disruptions, with growth of both new work and business activity softening for the third straight month. With this now over, upcoming releases of PMI data will be key in showing whether the sector was only hampered by the elections or is actually cooling.

"Signs that we may see a revival in the service sector in the near-term were, however, evidenced by a pick-up in hiring activity and improved sentiment. Also supportive of greater client spending and investment among businesses is the evident lack of inflationary pressures.

"Taking the results released today in conjunction with manufacturing sector data published on Monday, PMI figures show that the combined private sector remains in good health. Some ground was lost so far in the first quarter of fiscal year 2019/2020 but, with a government formed and a resumed policy agenda, a recovery is expected as we head towards the second half of 2019."

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