The services sector witnessed a slowdown in May as the Nikkei India Services Business Activity Index fell to 49.6 from 51.4 in April. This contraction is the first in three months.

The index is better known as the Purchasing Managers’ Index (PMI) and is prepared on the basis of a survey conducted among purchasing managers of over 400 private companies. These companies belong to five sectors, namely, consumer services, transport and storage, information and communication, financial and insurance and real estate and business services. An index over 50 shows expansion, and a figure below 50 indicates contraction. The index and subsequent report is prepared by IHS Markit.

Commenting on the Services PMI, Aashna Dodhia, Economist at IHS Markit, said the performance of the service sector was disappointing in May, as output dipped into contraction for the first time in three months. The slowdown in service activity fed into the labour market, as jobs growth moderated from April’s seven-year high.

However, “A bright spot of the services PMI data was that business sentiment was the strongest since January 2015, rooted in expectations of improvements in demand conditions in the year ahead,” she said.

Still, India saw the slowest improvement in the health of the overall economy since February, whilst the latest survey showed the effects of higher global oil prices as the private sector recorded the most marked input cost inflation for three months.

According to the report, despite lower output requirements, firms raised their payroll numbers for the ninth successive month during May. There were reports that firms raised their staffing levels in response to higher volumes of new business. However, job creation has eased to the weakest in 2018 so far and was modest. Jobs growth was evident across all broad five sectors, with the sharpest rise reported in information and communication.

According to the report, business activity decreased in May, thereby, ending a two-month sequence of expansion. Roughly 16 per cent of the respondents registered a decline in output, which Indian service providers linked to competitive conditions. That said, the rate of contraction was marginal. Three of the five monitored broad sectors reported reduced activity, namely consumer services, finance and insurance and real estate and business services.

Contraction of services is significant for overall economy as it has a share of approximately 54 per cent in Gross Value Addition (GVA). GVA gives more accurate picture to the economy as it is the value for the amount of goods and services produced in an economy after deducting the cost of inputs and raw materials that have gone into the production of those goods and services When tax is added and subsidy is deducted from GVA, it becomes GDP.

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