Indian services firms lose confidence amid easing pricing power

The pace of business activity in India’s services sector has moderated in February. The seasonally adjusted HSBC India Services Business Activity Index stood at 60.6 in February, down from sixmonth high of 61.8 in January. Still, the reading remains above its longterm average and ahead of the crucial threshold of 50, which denotes expansion.

The drop in the headline index was contained to an extent by the demand both in exports and domestically. In fact, the new business from abroad placed with services firms in India rose for the thirteenth successive month.

Survey participants saw gains from Australia, Asia, Europe, the Americas and the United Arab Emirates. Collectively, international sales expanded at a solid rate that was among the best in the nine-anda-half-year series history, said the survey report.

Secondly, there was a respite from input cost inflation. While services providers’ operating expenses inched higher in February, the PMI sub-index measuring this parameter rose at the second weakest rate since August 2020.

But not all is hunkydory. Services companies attempt to protect their operating margins by raising prices charged to customers, but their pricing power has softened.

The index gauging this metric fell below its long-run average and cooled to the weakest level in the last two years in February. In comparison, manufacturers are relatively better placed with ongoing increases in selling price.

Consequently, business confidence among Indian services providers regarding the year-ahead outlook for activity took a beating.

Mirroring the bleak sentiment, trends in hiring have remained unimpressive pointing to potential demand pressure amid slower rise in work backlog.

According to the survey, participants workforce numbers were sufficient for current requirements. Going ahead, the services sector could face challenges from moderation in urban demand as urban wage growth slows.

“The PMI survey indicates that growth recovery momentum in the services sector has held up in Q4FY24. However, overall listed company employee cost, which is our proxy for urban wage growth, has shown some moderation to 7.7% year-on-year in Q3FY24 from a 11.1% year-on-year average in H1FY24,” said Gaura Sen Gupta, economist at IDFC First Bank.

In short, this would cloud demand outlook for the services.

The services sector could face challenges from moderation in urban demand as urban wage growth slows