Following manufacturing, the services sector too showed a much better performance in November as Purchasing Managers’ Index (PM) to 56.4 as against 55.1 in October. This is the quickest expansion in three months.

The index is prepared by S&P Global based on the survey conduced among purchasing managers of 400 companies. “Survey participants linked the latest expansion to demand strength, successful marketing and a sustained upturn in sales,” the agency said. Index above 50 means expansion while below 50 denotes contraction.

Services has a maximum share in Gross Value Added (GVA). With over 54 per cent share, the performance of this sector is critical for the overall economy. It may be recalled that the performance of manufacturing mining and mining sectors dragged the GDP growth during the July-September quarter (Q2) of the current fiscal.

Now, during the first two months of the Q3 (October-December), both manufacturing and services have done better, impacting the overall economy.

Talking about the performance of the service sector in November, Pollyanna De Lima, Economics Associate Director at S&P Global Market Intelligence, said that Indian service providers continued to reap the benefits of strong domestic demand, with PMI data for the penultimate month of 2022 showing faster increases in new business and output. Moreover, expectations of demand buoyancy in the medium term promoted further job creation.

“Whilst, on the whole, the latest results are encouraging, the trend for inflation is somewhat concerning. Strong demand for services again boosted firms’ pricing power, with more companies transferring cost increases to their customers. The overall upturn in input costs was sharp and little changed from October, while output charges rose at the quickest rate in over five years,” she said.

Job creation

One important element of November’s performance was job creation. The agency noted that sustained expansions in new work intakes and demand buoyancy continued to promote job creation in the service economy.

Employment rose at a solid pace that was among the quickest in over three years. Another factor that triggered job creation was an uptick in business confidence.

“Service providers were at their most upbeat towards the year-ahead outlook for output in just under eight years. Firms largely expect demand strength to be maintained in 2023, with some planning to lift marketing budgets to aid sales,” it said.

Further, it added that whereas ongoing increases in new business exerted upward pressure on the capacity of services firms, job creation in recent months enabled slower backlog growth. Outstanding business expanded only fractionally in November and at the second-slowest pace in the current sequence of accumulation that started in January.

Another key factor is inflation. De Lima felt evidence of stubborn inflation may prompt further hikes to the policy rate at a time when global economic challenges could negatively impact India’s growth.

The Monetary Policy Committee is scheduled to announce a rate review this week and the expectation is that there could be another round of policy rate hikes.