Services PMI slipped to 52.4 in August

After manufacturing, services too is showing stress, as the Purchasing Managers’  Index (PMI) for services came down to 52.4 in August from 53.8 in July.

Services PMI is an economic indicator that is taken into consideration by various policy makers, including the Reserve Bank of India, for policy rate revision.

This index is based on a survey conducted by IHS Markit. It involves responses from around 400 service sector companies. The sectors covered include consumer (excluding retail), transport, information, communication, finance, insurance, real estate and business services. The panel is stratified by detailed sector and company workforce size, based on contributions to GDP (Gross Domestic Product).

The Survey responses are collected in the second half of each month and indicate the direction of change compared to the previous month. The indices vary between 0 and 100, with a reading above 50 indicating an overall increase compared to the previous month, while a reading below 50 indicates an overall decrease.

Commenting on the latest PMI for services, Pollyanna de Lima, Principal Economist at IHS Markit, said the weaker PMI readings for India's service sector match the trend noted in the manufacturing industry, bringing unwelcome news of a cooling economy halfway through the second quarter of fiscal year 2019/20.

Although the two surveys combined point to another round of job gains, a retreat in the rate of employment expansion highlights a wait-and-see approach among businesses, longing for a meaningful and sustained pick-up in demand growth.

"An important development, however, is evident in a rebound in business sentiment. Both manufacturers and service providers believe that supportive public policies can help shift the growth momentum into a higher gear in the coming 12 months. Despite signals of slower growth, survey data indicates that private sector companies maintained some pricing power, particularly service providers who hiked their charges to the greatest extent in close to one-and-a-half years," she said.

This lower number has come at a time when all the key economic indicators point to a slowdown. The GDP growth rate for the first three months of the current fiscal was at 5 per cent, which is the lowest in 26 quarters. Similarly, the growth rate of the core sector (comprising eight key industrial sectors including cement, steel, electricity, etc) slowed to 2.1 per cent, which is the lowest in 50 months. At the same time, the rupee is trading below 72 against the dollar. Technically, it is a slowdown, but some economists also term it a ‘quasi recession’ as the GDP growth rate has gone down for two consecutive quarters causing worry for the present Government.

Business environment in services sector

The report accompanying the PMI said business conditions in the Indian service sector remained conducive to economic growth in August, with PMI data highlighting sustained increases in activity, sales and employment. However, in all three cases, rates of expansion softened from July. Inflationary trends were mixed, with a slower increase in input costs contrasting with a faster upturn in charges. Meanwhile, supportive public policies and predictions of better demand pushed business sentiment up to a one-year high.

Companies that signalled growth commented on favourable government policies, improved technology and new business gains. Mirroring the trend for output, new business inflows rose at a softer pace in August. Growth was, however, sustained in four of the five monitored sub-sectors, the sole exceptions being real estate and business services. Despite easing from their July levels, the increase in new export orders remained stronger than that seen for total new work.

Survey participants indicated that advertising efforts boosted international sales in August. In response to ongoing increases in new work and upbeat growth projections, firms hired additional workers in August. The latest rise took the current stretch of job creation to two years and the pace of expansion remained above its long-run average, despite easing from July. Furthermore, employment job creation and output expansion curbed by weaker sales gains.

Composite PMI Output Index

This index is a combination of manufacturing and services PMI. The report mentioned that the growth of the Indian private sector activity eased from July's eight-month high, reflecting a slowdown in new business gains. Growth lost momentum in both the manufacturing and service economies. Accordingly, the composite PMI output index dropped to 52.6 in August from 53.9 in July.

Also read: Is the slowdown cyclical or structural?