Con­trac­tion Con­tin­ues In Ser­vice Sec­tor

Busi­ness ac­tiv­i­ties and new work or­ders have been hit se­verely by GST in­tro­duc­tion

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Ser­vices sec­tor in In­dia suf­fered the sec­ond con­sec­u­tive month of con­trac­tion in Au­gust as busi­ness ac­tiv­ity and new work or­ders got af­fected by the Goods and Ser­vices Tax (GST), a monthly sur­vey has found. The sec­tor which con­trib­utes near 55 per­cent of the na­tional Gross Do­mes­tic Prod­uct (GDP) and cre­ates near 25 per­cent of the na­tional job op­por­tu­ni­ties has been hit se­verely not just by the re­cently in­tro­duced GST, but poor in­fra­struc­ture which in­cludes power and trans­port ser­vices have also added wounds to its in­juries. The Nikkei In­dia Ser­vices PMI Busi­ness Ac­tiv­ity In­dex im­proved slightly from 45.9 reg­is­tered in July to 47.5 in Au­gust, point­ing to a sec­ond suc­ces­sive de­cline in out­put. A read­ing above 50 in­di­cates ex­pan­sion, while a score be­low this mark means con­trac­tion.

“Ser­vices acted as a drag on the pri­vate sec­tor econ­omy in Au­gust, with the re­duc­tion in busi­ness ac­tiv­ity off­set­ting growth of man­u­fac­tur­ing pro­duc­tion,” said Pollyanna De Lima, Prin­ci­pal Econ­o­mist at IHS Markit, and au­thor of the re­port re­leased last fort­night. Though the down­turn was less se­vere than in July, but jobs were shed, due to fewer work­loads, and back­logs were also ac­cu­mu­lated.

The ser­vices sec­tor had slipped into con­trac­tion in July as con­fu­sion caused by the GST roll­out trig­gered a dip in new busi­ness or­ders. In Au­gust as well, sur­vey re­spon­dents said though the new tax­a­tion sys­tem and ad­ver­tis­ing cam­paigns are an­tic­i­pated to sup­port growth, but there were wor­ries about com­pet­i­tive pres­sures.

“The un­der­ly­ing trend for ser­vices is one of un­cer­tainty. Busi­nesses are hold­ing back on in­vest­ment, lead­ing to falls in em­ploy­ment. At the same time, in­put costs are in­creas­ing and firms are un­able to fully pass these on due to com­pet­i­tive pres­sures,” Lima added.

Ser­vice providers re­tained an op­ti­mistic view towards the year-ahead out­look for ac­tiv­ity, over­all sen­ti­ment de­creased in Au­gust.

Lima fur­ther said “it’s not all doom and gloom” as busi­ness ac­tiv­ity, new busi­ness and em­ploy­ment showed much slower rates of re­duc­tion than those recorded in the July sur­vey. Mean­while, the coun­try’s man­u­fac­tur­ing sec­tor was back into growth zone in Au­gust on surge in new busi­ness or­ders af­ter the GST-re­lated con­trac­tion in July.

But this growth was in­suf­fi­cient to off­set the con­trac­tion in ser­vices ac­tiv­ity and ac­cord­ingly pri­vate sec­tor out­put re­mained in the con­trac­tion zone. The Nikkei In­dia Com­pos­ite PMI Out­put In­dex rose from July’s 100-month low of 46.0 in July to 49.0 in Au­gust.

On the prices front, there was “muted in­fla­tion­ary pres­sures” in the ser­vices sec­tor. Com­pa­nies said they paid more for bev­er­ages, food, fuel and pa­per and pass­ing on to con­sumers only part of the ad­di­tional cost bur­den, it added. On con­trac­tion in the ser­vice sec­tor for con­sec­u­tive months and the sec­tor be­ing at nadir in last five years, mar­ket ex­perts be­lieve that data base on the ser­vice sec­tor is highly disor­ga­nized. It has been rec­og­nized in var­i­ous stud­ies that the lim­i­ta­tion of the ex­ist­ing sys­tem is marred by the ab­sence of a well-or­ga­nized mech­a­nism for main­tain­ing a reg­u­lar and proper data­base for this sec­tor. A large num­ber of the un­or­ga­nized units are lo­cated in the ser­vice sec­tor and the com­po­si­tion of units in the do­main un­der­goes changes at a rapid pace be­cause new units or newer ser­vice ar­eas come into ex­is­tence and oth­ers dis­ap­pear with alarm­ing fre­quency. There­fore, the need for “de­vis­ing a proper clas­si­fi­ca­tion of ser­vices” by iden­ti­fy­ing all new ser­vices and adopt­ing a suit­able method­ol­ogy so as to main­tain in­ter­na­tional com­pa­ra­bil­ity of data is need of the hour.

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