Services sector growth slows, PMI at 12 month low with 50.2 in May

The manufacturing sector’s performance failed to enthuse the service sector after the Purchasing Manager's Index (PMI) for services in May dropped to 50.2 as against 51 in April. This is the weakest expansion in a year.

If the index is on or above 50, it implies that there is an expansion, while a score that is below 50 denotes contraction.

According to a report prepared by the IHS Market, India’s service economy had weakened in May due to disruptions arising from the elections in the earlier part of the month. 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 report also mentioned that a resilient manufacturing industry acted to offset the service sector weakness, as faster production growth meant that the upturn in private sector output steadied. That is why the composite PMI output remained at 51.7 in May. The reading was indicative of a moderate pace of increase that was the joint-slowest since last September.

Overseas demand

New business inflows, among the service providers, had increased at the slowest pace in eight months. Factory orders expanded at a quicker pace in May.

The rise in total new work across the service economy was supported by strengthening the demand from overseas. The new export business increased for the third straight month, and to the greatest extent in 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.

Increased hiring

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 the average rate. With factories also lifting head counts, private sector jobs in India expanded at the fastest pace since February.

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

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