Services PMI Plunges to 4-yr Low in July on GST Worries
Follows dip in manufacturing PMI for the same month; but sector confidence at 11-month high
New Delhi: India’s services activity plunged to a four-year low in July because of the disruption caused by the goods and services tax (GST), a private survey showed, but industry is confident of a quick rebound as the new tax regime settles into place. This follows a manufacturing indicator plummeting to an eight-year low last month because of the same reason — GST, which was rolled out on July 1. The Nikkei India Services PMI Business Activity Index plunged from June’s eight-month high of 53.1 to 45.9 in July, its lowest level since September 2013, but confidence about the future tellingly touched an 11-month high.
A reading above 50 on the index denotes expansion while a number less than the halfway mark is
an indicator of contraction.
“PMI data for July highlight a reversal in fortunes across India, with the economy going into reverse mode after seeing a pickup in growth momentum during June,” said Pollyanna De Lima, eco-
nomist at IHS Markit and author of the report. The Reserve Bank announced a 25 basis point cut in the key interest rate on Wednesday to boost growth amid sluggish industrial activity and low inflation. The central bank sounded a cautionary note on growth on account of sluggish private investment and other factors, while retaining its forecast on economic expansion.
“The 78th round of the Reserve Bank’s industrial outlook survey (IOS) revealed a waning of optimism in Q2 about demand conditions across parameters, and especially on capacity utilisation, profit margins and employment,” the central bank said in its policy announcement. “In its assessment of real activity, the MPC (monetary policy committee) noted that while the outlook for agriculture appears robust, underlying growth impulses in industry and services are weakening, given corporate deleveraging and the retrenchment of investment demand.”
Data released earlier in the week showed a steeper fall in manufacturing PMI to an eight-year low in July due to GST-related adjustments in manufacturing. The Nikkei/IHS Markit composite Purchasing Managers’ Index, which measures both manufacturing and services activity, sank to 46 — its lowest reading since March 2009 — from June’s eight-month high of 52.7.
Recent official data has also not been too positive with core sector growth slowing to a 19-month low of 0.4% in June.
Excepting finance and insurance, the other four sectors — consumer services, transport and storage, information and communication, and real estate and business services — reported a contraction in new business.
Though firms expressed a lack of adequate knowledge regarding GST, they expect more clarity in the near term to lead to activity growth.
Around one in four service providers foresee output growth in the year ahead, compared with only 1% of firms that forecast a reduction.
As per the monthly survey, the overall level of sentiment climbed to an 11-month high and prospects are anticipated to improve amid hopes of more transparency regarding GST. There were also mentions that marketing campaigns will support activity growth. “Whereas many will question how deep an impact the GST will have on the economy in the nearand long-term, firms seem convinced that prospects will brighten as the new tax regime becomes clearer,” De Lima said.
Services charges rose at the sharpest rate in almost four-and-a-half years in July in contrast with manufacturers, which offered discounts amid efforts to stimulate demand.