The services sector, which accounts for two-thirds of the economy, saw a sharp deceleration last month, according to the HSBC Services Purchasing Managers’ Index (PMI). The reading for August came in at 53.8 compared with 58.2 in July. The deceleration has been rather rapid, though it must be remembered that the index had gone up in June and July, and it was at 55 in May. So both the PMI indicators, for manufacturing and services, moderated in August. The chart shows the changes in the composite PMI index (for both manufacturing and service activity).
The August PMI data will be the latest numbers the Reserve Bank of India (RBI) will have on growth before its next monetary policy announcement. While the August inflation data will be out before the announcement, that’s only the wholesale price data, while the services PMI gives an indication of how price pressures are shaping up in the services sector. Here the indications are worrying, because the prices-charged sub-index went up a bit in August. It was at 57.9 compared with 57.1 in July and a much lower 53.6 in June. That indicates companies are able to pass on the rise in input prices. The output price sub-index for manufacturing was 55.6 in August, a bit lower than July’s 56, but higher than June’s 54.6. In any case, a reading above 50 indicates that prices are still rising month-on-month.
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True, PMI falls under the category of soft data, since it is survey-based. But given the imperfections with India’s hard data, in particular the Index of Industrial Production, PMI becomes a very useful indicator of the state of the economy.
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The numbers clearly show that growth is moderating and at a rapid clip. The new orders sub-index, which serves as a lead indicator, shows a significant deceleration. However, the excellent export numbers from the commerce ministry are at variance with the export orders sub-index of the PMI.
For the services sector, too, the new business sub-index has slowed sharply. There’s also another indication of growth slowing—the employment sub-indices of both the services and manufacturing PMIs have fallen below 50, which means employment has started to contract.
In short, while the moderation in growth suggests that a pause in rate hikes by RBI is near, the continuing rise in output prices indicates that inflationary pressures are still strong and another rate increase would be just what the doctor ordered.
Graphics by Ahmed Raza Khan/Mint
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