Services sector contracts for first time in 8 months
The PMI fell to 46.4 in May, down from 54.0 in April, due to the Covid-19 crisis
India’s services sector activities slumped into contraction territory for the first time in eight months, amid renewed decline in new work intakes due to the escalation of the pandemic and the reintroduction of restrictions, a monthly survey said.
The seasonally adjusted India Services Business Activity Index fell to 46.4 in May, down from 54.0 in April, as the intensification of the Covid-19 crisis caused renewed declines in new business and output.
In PMI parlance, a print above 50 means expansion while a score below 50 denotes contraction.
“The intensification of the Covid-19 crisis and associated restrictions suppressed domestic and international demand for Indian services. Total sales decreased for the first time in eight months, while the fall in external orders was the most pronounced since last November,” said Pollyanna De Lima, Economics Associate Director at IHS Markit.
International demand for Indian services also worsened, with new export business falling at the quickest rate in six months. The drop was attributed to international travel curbs and business closures.
On the job front, pandemicrelated worries and falling sales led services companies to reduce workforce numbers again during May.
“Amid efforts to keep a lid on expenses given the deterioration in new business, services companies reduced payroll numbers to the greatest extent in seven months. Concerns towards the outlook, evidenced by a dip in sentiment, could prevent job creation in the nearterm,” Lima noted.
On the inflation front, amid reports of higher prices for a wide range of inputs and fuel, operating expenses at services firms continued to increase in May.
“... The overall rise in cost burdens was historically sharp as prices for a wide range of inputs and fuel continued to surge. Only a small proportion of firms shared additional cost burdens with their clients, resulting in only a marginal increase in services fees,” Lima said.
Meanwhile, the Composite PMI Output Index, which measures combined services and manufacturing output, was down from 55.4 in April to 48.1 in May, pointing to a renewed decline in private sector activity across India.
Aggregate new orders decreased for the first time in nine months and private sector jobs fell for the 15th month in succession.
Last week, the Reserve Bank of India (RBI) has described the contraction in the service sector during 2020-21 as “unprecedented in Independent India’s history”, observing that even during the global financial crisis, it had remained resilient.
“The contraction in the services sector in 2020-21 is unprecedented in independent India’s history. Even during the global financial crisis, the services sector remained resilient. In 2020-21, however, construction suffered in the aftermath of the pandemic due to an inventory overhang in residential housing, coupled with stressed liquidity conditions which restricted new launches. The situation was exacerbated by imposed social distancing norms which led to construction activity in the first quarter of 2020-21 getting reduced by half year-on-year,” the central bank has noted in its annual report for 2020-21.
On the macroeconomic front, India’s economy contracted by less-than-expected 7.3% in the fiscal year ended March 2021 after growth rate picked up in the fourth quarter.