Services PMI in contraction zone, records 49.3 in March

Services sector, the biggest contributor in India’s gross domestic product (GDP), showed first big impact of Covid-19 as Purchasing Managers’ Index (PMI) shrunk to 49.3 in March from 57.5 in February. But economists feel that the worst is yet to come.

According to Economic Survey, services’ share in India’s gross value added (GVA) during first half of 2019-20 was 57.8 per cent. But once tax is added and subsidy is subtracted from GVA, it becomes GDP.

Commenting on latest PMI number, Joe Hayes, Economist at IHS Markit, said that the impact of the global Covid-19 pandemic on India's services economy has not been fully realised yet. March PMI data showed business activity falling mildly. However, the survey data collection (March 12-27) was concluding just as Prime Minister Modi ordered a complete lockdown of the country.

"Strong growth momentum seen so far in 2019 was halted in March as demand conditions deteriorated, particularly overseas, leading to a reduction in business activity. Clearly the worse is yet to come as nationwide store closures and prohibition to leave the house will weigh heavily on the services economy, as has been seen elsewhere in the world,” he said.

He further added that pressure now fully lies on the government to combat the economic challenges the lockdown will cause.

PMI is derived on the basis of survey conducted and compiled by 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.

The index is the sum of the percentage of ‘higher’ responses and half the percentage of ‘unchanged’ responses. 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.

According to report released along with PMI, having recorded the strongest rise in business activity for over seven years in February, latest survey data brought this to an abrupt end as services output in India declined in March.

According to firms, the outbreak of the coronavirus disease 2019 (Covid-19) dented client demand, particularly in overseas markets, as discretionary spending was knocked by public health measures.

Firms responded by reducing their workforces as intakes of new business were insufficient to maintain payroll numbers. That said, input costs rose at the slowest rate in six months as market prices for food and fuel were cut by suppliers.

Looking further ahead, latest data showed firms were still optimistic that activity levels would rise over the next 12 months as the extreme measures to curb the spread of Covid-19 are lifted and global demand begin to recover. That said, the level of confidence dipped to a five-month low.

Lastly, input costs facing Indian service providers increased at the slowest rate for six months during March. Anecdotal evidence suggested that lower market prices for food and fuel contributed to a weaker rate of inflation.

Since, manufacturing was also down, it also affected composite index. Accordingly, the Composite PMI Output Index fell to 50.6 in March, down 7 points from February's 57.6 to signal a sharp slowdown in private sector output growth and bringing an abrupt end to the recent strong upward-moving expansion trend. Overall, the index was consistent with a marginal rate of increase in private sector output.

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