Services PMI at 12.6 in May as activities contract sharply due to pandemic

The services sector again faced extreme headwinds in May as the Purchasing Managers’ Index (PMI) clocked 12.6 in May.

Although the headline figure for May rose from April's unprecedented low of 5.4, it remained at a level which, prior to the coronavirus pandemic, is unparalleled in over 14 years of data collection and points to an extreme drop in services activity across India.

The performance of the service sector is critical to gauge the economic situation as it has a nearly 57 per cent share in the Gross Domestic Product (GDP). The services growth rate declined to 5.5 per cent in FY 2019-20, which dragged the overall GDP growth rate to 4.2 per cent during the year.

The India 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.

Commenting on the latest number, Joe Hayes, Economist at IHS Markit, said service sector activity in India is still effectively on hold, the latest PMI data suggests, as output fell at an extreme rate once again during May. Given the stringency of the lockdown measures imposed in India, the severity of the declines in April and May is no surprise. Demand for services, both domestically and overseas, continued to plummet in May as clients' businesses remained closed and footfalls remain drastically below normal levels. "With economic output set to fall enormously in the first half of 2020, it is clear that the recovery to pre-Covid-19 levels of GDP is going to be very slow,” he said.

The report accompanying PMI found that business activity across India's service sector fell drastically during May, as the unfavourable economic effects of the coronavirus disease 2019 (Covid-19) pandemic impaired business operations, restricted consumer footfalls and led demand to collapse. While most measures came off the unprecedented lows seen in April, survey data still pointed to extreme month-to-month declines in output and new orders. Spare capacity continued to rise, albeit to a far lesser degree than in May, as prolonged shutdowns led to a rise in incomplete work at some companies. Meanwhile, employment continued to fall in response to weak demand and expectations of further challenging conditions.

The report also said in response to absent demand pressures and low business requirements, employment in the Indian service sector companies fell during the latest survey period. The rate of job shedding remained strong by historical comparisons, despite easing since April. Lower staffing levels also coincided with a further deterioration in business sentiment. Output expectations for the coming 12 months slumped to their most negative since records began in December 2005 amid forecasts of prolonged economic weakness domestically and overseas.

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