SERVICES SECTOR CONTRACTS FOR SECOND MONTH IN A ROW

August PMI falls to 47.5 from 45.9 in July

The introduction of the nationwide goods and services tax continued to be a drag on activity in the services sector in August, for a second month, with companies having to handle higher input prices and slow demand.The widely-tracked Nikkei Purchasing Managers’ Index showed a reading for the services sector of 47.5 in August.

Introduction of the nationwide goods and services tax (GST) continued to be a drag on activity in the services sector in August, for a second month, with companies having to handle higher input prices and slow demand.

The widely-tracked Nikkei Purchasing Managers’ Index (PMI) showed a reading for the services sector of 47.5 in August. The 50-point mark separates expansion from contraction. However, the decline was softer than in the previous month of July, when the PMI had plunged to a nearly four-year low of 45.9.

Last week, the latest gross domestic product (GDP) data showed a three-year plunge in economic growth at 5.7 per cent in the first quarter of the current financial year.

While PMI data for manufacturing rebounded in August, rising to 51.2 points from 47.9 in July, services' providers continued to grapple with a slowdown in new businesses. The entities surveyed blame this on subdued demand and rising competitive pressures emanating from GST.

“The tax rates under GST for a number of services have increased. More companies are affected by this, as compliance has also gone up,” said Aditi Nayar, principal economist at ratings agency ICRA.

The slowing in services could also be attributed to the fact that some of the major segments within the sector such as banking, telecom and information technology are dealing with unique sets of issues, she added.

The PMI survey for July showed output and new work had started declining for the first time since January. Likewise, factory orders had decreased in July, at the quickest pace since February 2009.

As a result of these trends, the labour market continued to be adversely affected, with employment continuing to decline, albeit marginally, for a second month. However, job shedding is expected to ease to a marginal pace, as the vast majority of service providers have left headcounts unchanged.

“The underlying trend for services is of uncertainty. Businesses are holding back on investment, leading to falls in employment,” said Pollyanna De Lima, principal economist at IHS Markit, which compiles the data, and author of the report.

Interestingly, manufacturers took on extra staff at the quickest rate in nearly four and a half years in August.