Services firms end FY24 on a high
Business activity in India’s services sector ended FY24 on a buoyant note. The seasonally adjusted HSBC India Services Business Activity Index rose to 61.2 in March from 60.6 in February.
The latest number pointed to one of the strongest growth rates the Indian services sector has seen in more than thirteen-and-a-half years, said the PMI report. A reading above 50 indicates expansion.
Robust domestic demand and favourable economic conditions boosted new business for services. Plus, new export businesses rose at the fastest rate since September 2014. Among the four broad areas of the service economy monitored by the survey, finance & insurance was an outperformer with quicker increases in output and sales. Strong demand pushed Indian service providers to increase hiring in March.
Further, service providers enjoyed enhanced pricing power. The rate of charge inflation, or selling price, climbed to its highest mark since July 2017. In fact, the Composite PMI (weighted average of manufacturing and services) showed that selling price inflation quickened to a five-month high. It outpaced its long-run average, solely due to a notable acceleration in the service economy as factory gate charges rose to a lesser extent, added the report.
Despite the positives, service providers are jittery. The Future Activity subindex—a gauge for business optimism —has slipped to a four-month low in March. For one, overall input costs for service providers have risen due to higher labour and material costs. The sub-index measuring input cost inflation rose to higher than February’s and stood above its long-run average.
There were also some concerns about competitive pressures. If competition remains high, then services companies may be pushed to ease their selling prices to protect market share.
“Urban consumption which had been strong in FY24 is expected to slow in FY25, with moderation in urban wage growth. We are already seeing signs of this with a slowdown in real urban wage growth in Q3FY24,” said Gaura Sen Gupta, economist at IDFC
First Bank. In short, moderation in urban demand could limit the pricing power of service companies.
The services sector is a crucial component of India’s gross domestic product (GDP), and thus trends here may have higher repercussions on overall growth. After all, the Indian stock markets have benefited from India’s relatively better economic growth than Asian peers, translating into foreign portfolio inflows lately.
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However, some downside risks to India’s growth linger. For instance, higher global crude prices pose a risk as India is a net oil importer.
Shilan Shah, deputy chief emerging markets economist, Capital Economics, expects India to be the fastest growing economy in the near term. However, he cautions growth in unsecured loans has boomed over the past 18 months and helped support household consumption.
With that, there could be a medium-term risk of rising defaults, hurting the banking sector’s ability to lend, and weigh on overall economic growth.
Meanwhile, all eyes will be on the RBI’s monetary policy decision on 5 April. The central bank is expected to maintain a status quo. In February, India’s annual retail inflation stood at 5.09% versus 5.10% in January due to elevated food prices. The headline inflation remains above the medium-term target level of 4%, due to volatile vegetable prices. For now, the RBI may take comfort from softening core inflation.