India's services activity rises to 59.2 in June, highest in 11 years

Services activity in June expanded at the fastest pace in over 11 years. This comes amid new demand orders and upturn in economic activity, following withdrawal of pandemic restrictions, a private survey showed.  

Data released by S&P Global on Tuesday showed that Purchasing Managers' Index (PMI) services rose from 58.9 in May to 59.2 in June, the highest since April 2011.

A print above 50 is considered expansion while below 50 is taken as contraction.

“Services firms noted a substantial upturn in new work intakes at the end of the first fiscal quarter, with the rate of increase improving to the best in over 11 years. Where growth was signalled, survey members commented on strengthening demand conditions, expanded client bases and fruitful marketing,” the report said.

However, PMI manufacturing data released on Friday showed slowing manufacturing activity from 54.6 in May to 53.9 in June. This is on the back of softer increase in production and rising inflationary concern.
 

Although firms expect recovery in services activity to be sustained over the next 12 months, concerns surrounding price pressures restricted business confidence.

Input costs continued to rise at a historically-elevated pace.

“Firms were able to secure new orders despite charging more for their services. June data showed the fastest rise in selling prices since July 2017 as several companies sought to transfer part of their additional cost burdens to clients. Stronger increase in charges was seen across the four broad areas of the service economy, with the sharpest upturn recorded in transport, information and communication,” the report said.

Unrelenting inflation continued to worry businesses that were cautiously optimistic about the year-ahead outlook for business activity.
 

The overall level of sentiment was well below its long-run average as only 9 per cent of companies forecast output growth, the report said.

Some companies responded to capacity pressures by hiring additional people in June, but the vast majority (94 per cent) left payroll numbers unchanged.

Overall, services employment rose marginally, following a decline in May.

Pollyanna De Lima, economics associate director at S&P Global Market Intelligence said improved demand for services supported a robust economic expansion for the sector. This may be in the first quarter of FY23, setting the scene for another substantial upturn in output next month.

“Consumer services posted the strongest increases in both output and new orders in June, but growth rates quickened across the board. Unrelenting inflation somewhat worried service providers, who were cautious in their forecasts. On average, business activity is expected to increase in the coming 12 months, but the overall level of sentiment remained historically low,” she added.

Aditi Nayar, chief economist at ICRA, said the jump in the services PMI corroborates the view that the services sector would lead the growth recovery in FY23.

“Middle-to-high income households are likely to prioritise spending on contact-intensive services, which were avoided during the pandemic, at the cost of consumer durables. This is likely to result in a slower improvement in capacity utilisation levels, delaying the private sector’s capex plans. It comes amid the global headwinds and elevated commodity prices,” she added.

Many professional forecasters have, in recent months, lowered their growth forecasts for India.

While the Reserve Bank of India (RBI) has retained its earlier growth projection of 7.2 per cent for FY23, the Organization for Economic Cooperation and Development (OECD) has slashed India’s FY23 growth forecast to 6.9 per cent from 8.1 per cent estimated earlier. It held that the country had been adversely affected by Russia’s invasion of Ukraine.

Last month, the RBI increased policy rates by 50-basis points (bps) to 4.9 per cent. It is the second hike in just over a month, to curb rising inflationary expectations. Many commercial banks have followed the rate action by increasing lending rates. This may hurt the fledgling economic growth momentum.