Growth in services sector shrinks on poor demand
Worst is yet to come as ongoing lockdown will take a heavy toll
nNEWDELHI: Growth in India’s services sector contracted in March after posting the strongest rise in business activity in more than seven years in February, as the covid-19 outbreak dented demand, particularly in overseas markets, according to a survey by IHS Markit showed.
The impact of the pandemic is set to worsen in the coming months with the government enforcing an unprecedented 21-day nationwide lockdown from 25 March which has left industries and shops shut, the data analytics firm said.
The Services Purchasing Managers’ Index (PMI) fell to 49.3 after rising for five consecutive months and from February’s 85-month high of 57.5, the survey showed.
A figure of above 50 indicates expansion, while a sub-50 print signals contraction. The manufacturing PMI data for March issued last week showed a decline to a four-month low of 51.8 from 54.5 in February.
IHS Markit said services companies responded to the disruptions caused by covid-19 by reducing their workforce as insufficient new business flows made the current staff strength unsustainable.
“Poor conditions in overseas markets led to the sharpest deterioration in foreign demand since exports data were first collected in September 2014. The global covid-19 pandemic had a far-reaching impact on the ability of firms to source new work intakes from abroad,” it added.
Joe Hayes, an economist at IHS Markit, said the impact of covid-19 on India’s services economy has not been fully realised yet. “March PMI data showed business activity falling mildly. Crucially, however, the survey data collection (12-27 March) was concluding just as Prime Minister Modi ordered a complete lockdown of the country. Clearly, the worst 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, adding that “pressure now fully lies on the government to combat the economic challenges the lockdown will cause”.
With the pandemic severely affecting businesses, employment levels across India’s services sector fell as companies trimmed their workforce to control costs.
However, the rate of job cuts was mild in March with 93% of the companies leaving their payroll counts unchanged, IHS Markit said.
India’s growth in gross domestic product (GDP) is estimated to have fallen below 5% in FY20 from 6.1% in FY19, as domestic investment and consumption demand were under stress because of the liquidity crunch that non-banking financial companies faced and the sharp slowdown in credit growth.
Most economists now expect economic growth to contract in the June quarter due to the lockdown. Fitch Ratings sharply reduced its FY21 growth projection for India to 2%—lowest in three decades—from 5.1% estimated just 15 days ago. Moody’s and S&P expect the economy to grow at 2.5% and 3.5% respectively in the current financial year.
Finance minister Nirmala Sitharaman has rolled out a ₹1.7 lakh crore relief package, in an attempt to limit the economic damage caused by the coronavirus outbreak and tackle loss of livelihood of millions of poor hit by the unprecedented lockdown. The relief package aims to alleviate the financial pain faced by migrant workers, farmers, urban and rural poor, and women.
The government is also working on a fiscal stimulus to jump-start the economy apart from providing support to the healthcare and industrial sectors, economic affairs secretary Atanu Chakraborty hinted last week. The Reserve Bank of India (RBI) has also taken a series of steps to boost liquidity in the banking system and encourage banks to lend.