Any concerns by the June HSBC Manufacturing Purchasing Managers’ Index (PMI) that the pace of growth in the economy may be decelerating have been quickly dispelled by the services PMI, which shows that business activity in the sector reached a two-year high reading of 64 last month.
Given that manufacturing contributes less than 20% to the gross domestic product, while services account for over 60%, the strong growth in the services sector is more than sufficient to offset any weakness in manufacturing.
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The net result: at 62.8, the HSBC Composite Output Index (for both manufacturing and services) for June points to the sharpest rise in activity for almost two years. What’s more, the new business component of the services PMI, which is an indication of the strength of future activity, reached a new cyclical high of 63.32.
Businessmen in the services industry are very optimistic, with the business confidence component of the PMI showing a reading of 75, which, according to Frederic Neumann, co-head of Asian Economics Research at HSBC, is at levels last seen at the end of 2007. Clearly, the Reserve Bank of India did the right thing on Friday by raising rates.
Unlike in the manufacturing sector, where the rate of growth of output prices eased, prices charged by services industries continued to rise at a higher rate in June. The rate of increase in input prices, however, fell for both manufacturing and services. Prices continue to rise, but the pace of the increase has moderated a bit.
India is one of the few countries that have shown an improvement in the services PMI reading in June. China’s HSBC services PMI, although showing growth, was the weakest in 15 months. The Markit euro zone services PMI is at a three-month low. In the UK, services business activity rose at its slowest pace in 10 months. And in Japan, the services sector continued to decline.
This clearly suggests that monetary policy in India needs to be much tighter than in the rest of the world.
Graphic by Yogesh Kumar/Mint
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