Economy

Second wave pushes services sector back into contraction after 8 months

Reuters Our Bureau New Delhi | Updated on June 03, 2021

‘While PMI data released at the start of the month showed that the manufacturing industry managed to keep its head above water in May, the service sector struggled as the pandemic escalated’ (file photo)   -  REUTERS

Job cuts quicken; overall demand contracted at the sharpest rate since August

With local lockdowns in major States and Union Territory, the services sector struggled in May as Purchasing Managers’ Index (PMI) dropped to 46.4 in May from 54 in April. This is first contraction in eight months. Bad news is that job shedding was highest in last eight months.

“While PMI data released at the start of the month showed that the manufacturing industry managed to keep its head above water in May, the service sector struggled as the pandemic escalated,” Pollyanna De Lima, Economics Associate Director at IHS Markit said. PMI is prepared and reported by economic research agency IHS Markit.

She further mentioned that the intensification of the Covid-19 crisis and associated restrictions suppressed domestic and international demand for Indian services. Total sales decreased for the first time in eight months, while the fall in external orders was the most pronounced since last November.

Also read: Virus disaster leaves deep scars on India’s economy

On Tuesday, the agency said that the manufacturing sector is heading towards stagnation and its PMI slipped to 50.8 in May from 55.5 in April. Services has maximum share in India’s Gross Domestic Product (GDP) with over 57 per cent contribution. Manufacturing has around 17 per cent share in GDP. Both the sectors are facing job loss.

This means almost two third of the economy was not in good shape during May. This is expected to affected GDP growth rate during April-June quarter, for which the official data will be out in August.

Methodology

Both PMIs are prepared by compiling responses from questionnaires sent to a panel of around 400 companies each from manufacturing and services sector. 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.

Talking about jobs, report accompanying Services PMI said that the pandemic-related worries and falling sales led services companies to reduce workforce numbers again during May. The decline was modest, but the quickest in the current six-month sequence of job shedding.

‘Fall in job creation’

“Amid efforts to keep a lid on expenses given the deterioration in new business, services companies reduced payroll numbers to the greatest extent in seven months. Concerns towards the outlook, evidenced by a dip in sentiment, could prevent job creation in the near-term,” De Lima said.

Also read: Monetary policy must remain accommodative

Further, she mentioned that the anecdotal evidence indicated that a fall in staff expenses indeed helped curb the rate of input price inflation. Yet, the overall rise in cost burdens was historically sharp as prices for a wide range of inputs and fuel continued to surge. “Only a small proportion of firms shared additional cost burdens with their clients, resulting in only a marginal increase in services fees,” she said.

During the month of May, real estate and business services was the worst-affected segment out of the five monitored categories, recording the quickest declines in both new business and output. On the other side of the spectrum was transport and storage, where substantial increases in activity and sales were registered.

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Published on June 03, 2021

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