Services PMI at 59.2, highest since April 2011

Services activities are on rise as Purchasing Managers’ Index (PMI) rose to 59.2 in June. This is highest mark since April 2011. Good news is that companies went for fresh hiring in June. However, inflation is still a concern.

Service sector is the biggest contributor to the Indian economy in terms of value. It has a share of over 53 per cent in gross value added (GVA). PMI is based on survey and data compiled by S&P Global.

Cost pressures remain high

On the latest survey results, Pollyanna De Lima, Economics Associate Director at S&P Global Market Intelligence said that activity growth in India’s service sector moved up a gear again in June, reaching its strongest in over 11 years and surpassing that seen in manufacturing for the third month running. Demand for services improved to the greatest extent since February 2011, supporting a robust economic expansion for the sector over the first quarter of fiscal year 2022-23 and setting the scene for another substantial upturn in output next month.

“Consumer Services posted the strongest increases in both output and new orders in June, but growth rates quickened across the board. Cost pressures in the service economy remained stubbornly high in June, despite easing to a three-month low. With companies retaining significant pricing power, owing to robust demand conditions, output charge inflation climbed to a near five-year peak,” she said.

IT, Transport sectors record upturn

According to S&P Global, some companies responded to capacity pressures by hiring additional staff in June, but the vast majority (94 per cent) left payroll numbers unchanged. Overall, “services employment rose marginally, following a decline in May,” it said.

Further, it highlighted that June data pointed to further accelerations in growth of new business and output at Indian services companies amid ongoing improvements in demand conditions. Although firms expect the recovery to be sustained over the coming 12 months, concerns surrounding price pressures restricted business confidence. Input costs continued to rise at a historically elevated pace, although one that was the slowest in three months, while charge inflation hit a near five-year high.

Inflation, a concern

June data showed the fastest rise in selling prices since July 2017 as several companies sought to transfer part of their additional cost burdens to clients. Stronger increases in charges were seen across the four broad areas of the service economy, with the sharpest upturn recorded in Transport, Information & Communication. Despite easing to a three-month low in June, the overall rate of input cost inflation remained elevated by historical standards as one-fifth of panellists signalled greater expenses and the remaining reported no change since May.

De Lima said that unrelenting inflation somewhat concerned service providers, who were cautious in their forecasts. On average, “business activity is expected to increase over the course of the coming 12 months, but the overall level of sentiment remained historically low,” she said.

The index is prepared on the basis of 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. The panel is stratified by detailed sector and company workforce size, based on contributions to GDP. Data collection began in December 2005. 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.

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