PMI: GST makes services sector activity plunge, but raises prices
The Nikkei India Services Purchasing Managers’ Index (PMI) plunged to 45.9 in July, its lowest reading since September 2013, due to the disruption caused by the goods and services tax (GST). A reading below 50 signifies contraction from the preceding month.
The fall in both the services and manufacturing PMI led to the Nikkei India Composite PMI Output index fall to 46 in July, from 52.7 in June, indicating a sharp contraction in private sector activity. The composite PMI had fallen below 50 in November and December 2016 and in January this year, as a result of demonetization.
Interestingly, the introduction of GST had different impacts on prices in the manufacturing and services sectors. Output prices in the manufacturing sector fell in July, as producers offered discounts to clear stocks and boost demand.
On the other hand, the index of prices charged in the services sector rose to its highest in four-and-a-half years in July. Those companies that reported higher selling prices linked this to the implementation of GST. Note that GST has raised the tax on services from 15% to 18%. Said the survey, “Services charges rose in July for the sixth month in succession, with inflation picking up to the quickest since early-2013.” If the momentum in services sector inflation persists, it could be bad news for any future rate cuts by the Reserve Bank of India.