Services sector shrinks again in August, but at a slower pace

India’s services sector showed some improvement in August as the Purchasing Managers’ Index (PMI) rose to 41.8, against 34.2 in July. This is the highest reading since March.

Nevertheless, the latest reading, by coming in below the 50.0 neutral value again, indicated a continued decline in business.

The performance of the services sector is critical to gauge the economic situation as it accounts for nearly 54 per cent of the GDP — the greatest among the three sectors, i.e. Services, Industry and Agriculture.

India’s Services PMI is compiled by economic research agency IHS Markit from responses to questionnaires sent to a panel of around 400 service sector companies. The sectors covered include consumer (excluding retail), transport, information, communication, finance, insurance, real estate and business services.

Survey responses are collected in the second half of each month and indicate the direction of change compared to the previous month. A diffusion index is calculated for each survey variable. The indices vary between 0 and 100, with a reading above 50 indicating an overall increase compared to the previous month, and below 50 an overall decrease.

Challenging conditions

Commenting on the latest reading, Shreeya Patel, Economist at IHS Markit, said that August highlights another month of challenging operating conditions in the Indian services sector. Sustained periods of closure and ongoing lockdown restrictions in both domestic and foreign markets have weighed heavily on the health of the industry, she added.

Output and new work continue to fall at solid rates, while restrictions meant that firms were often unable to complete projects. Backlogs of work accumulated to the greatest extent in almost 15 years of data collection. That said, the survey showed signs of a potential recovery, she said.

“Business sentiment was neutral after being negative in the previous three months and employment fell at the softest pace since March. Additionally, there were efforts to protect profit margins, firms raised their selling prices to pass on higher expenses to customers and recover lost revenues after a period of closure,” she added.

Increase in charges

According to report accompanying the PMI, the latest reading indicated a slower rate of decline in business activity across the Indian service sector during August. The ongoing pandemic restrictions continued to adversely impact client demand and business operations. New business and output continued to contract at marked rates, albeit slower than the records seen in April and May. Restrictions also contributed to a record increase in outstanding business. Meanwhile, sustained revenue losses through the second quarter and increasing cost burdens led companies to raise charges for the first time since March.

Reduced business activity saw the Indian service sector operating below capacity. As a result, firms reported job shedding for the sixth consecutive month. The fall in employment was only modest, however, and much slower than July's record. Ongoing Covid-19 restrictions and temporary business closures meant that firms were unable to process previously-placed orders, which led to incomplete work increasing for a third month running. Moreover, the pace of increase was substantial, and the fastest since the survey began in December 2005.

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