India’s HSBC Composite Purchasing Managers’ Index (PMI) for May has rebounded, mainly due to a sharp jump in the Services PMI, which went up from 52.8 in April to 54.7 in May. Since services is by far the largest sector of the Indian economy, the composite index that includes both manufacturing and services has also shown an improvement.
At first glance, the chart seems to be at odds with the recently released depressing gross domestic product (GDP) growth numbers for the March quarter. Of course, the PMI numbers show month-on-month growth, while the GDP growth data is year-on-year.
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Leif Eskesen, chief economist for India and Asean (Association of Southeast Asian Nations) at HSBC, points out, “While the annual GDP growth rate declined, the sequential growth rate actually accelerated (1.9% seasonally adjusted vs 0.9% in the December quarter). On that measure, the economy has recovered from the December quarter as reflected by both the PMI and GDP readings.”
Last month, business expectations in the services sector showed a strong rise, with its sub-index going up to 73.8 from 62.3 in March. It was clear that business believed growth would rebound soon in the services sector. Well, a rebound is exactly what happened. What’s more, the business expectations sub-index has moved up even further in May, a possible indication the upswing in the services sector will continue.
But any upturn in activity risks an upturn in inflation. The May services PMI data shows a jump in the prices charged sub-index. On the other hand, the output price component of the Manufacturing PMI showed some deceleration. While it’s true that core inflation, as measured by the rise in the prices of non-food manufactured products, is coming down and lower commodity prices will lead to lower input prices, the Reserve Bank of India (RBI) cannot ignore price rises in the services sector.
The pressure on RBI to cut the policy rate has risen after the dismal GDP data. But the PMI numbers call for caution.
Graphic by Ahmed Raza Khan/Mint
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