Despite a slight decline in comparison to April, the services sector performed well in May, according to a S&P Global Market Intelligence survey released on Monday. Another positive factor is that better performance also helped in the highest-ever job creation in the said month.

The result of the survey is known as Purchasing Managers’ Index (PMI). It reached 61.2 in May as against 62 in April. This is the second highest in 13 years. “Favourable demand conditions, new client wins and positive market dynamics reportedly supported output,” the report accompanying PMI said.

The survey is conducted among purchasing executives of 400 companies and the result of such a survey is one of the high-frequency economic indicators, released much in advance of the official figure. It may be noted that the services sector has over 50 per cent share in Gross Value Added (GVA).

‘A compelling testament’

Commenting on the data, Pollyanna De Lima, Economics Associate Director at S&P Global Market Intelligence, said that May data stand as a compelling testament to prevailing demand resilience, impressive output growth, and job creation within India’s dynamic service sector.

However, “inflationary pressures continued to pose a challenge for service providers, with panellists noting rising costs for food, inputs, labour, and transportation,” she said.

The report highlighted that external demand for Indian services continued to improve in May, highlighted by a fourth successive rise in new export business. Moreover, the pace of expansion was solid and the quickest in the calendar year-to-date.

To accommodate for sustained increases in new business, services companies sought to expand operating capacities by hiring extra workers. Employment rose at a slight rate that was nonetheless the fastest in 2023 so far, the report added.

Indian service providers reported higher food, input, transportation, and wage costs in May. Overall input prices rose at a marked rate that was the fastest since last December and above its long-run average.

Amid reports of rising cost burdens, firms charged more for their services in May. Having quickened to the joint-strongest in close to six years, the rate of charge inflation was solid.

“Faced with the delicate task of balancing these increases and maintaining affordable prices for consumers, firms opted to lift selling prices again in May. Worryingly, the survey showed the joint-fastest upturn in output charges for nearly six years,” De Lima said.

Navigating operational challenges

Further, while ongoing increases in output charges could erode purchasing power, affect the affordability of services, and potentially dampen economic growth, companies could be seeking operational efficiencies and exploring alternative sourcing options to navigate through these challenges.

Talking about the future, panelists maintained an upbeat view that business activity would increase over the coming 12 months. Advertising, demand strength, and favourable market conditions were among the reasons cited for optimistic forecasts.

The overall level of confidence fell slightly from April, however, amid some concerns about competitive pressures.

“With policymakers closely monitoring inflation developments, long-waited cuts to interest rates — which could aid business strategies, budgeting, and investment plans — appear more distant,” De Lima said.