Mumbai: As the Reserve Bank of India’s monetary policy committee is all set to deliver its verdict onc on Wednesday, the purchasing managers index (PMI) readings for November indicate that the economy is still not out of the woods.

The Nikkei India Services PMI shows that private sector activity in the services sector contracted in November, with the reading falling to 48.5 from 51.7 in October. A reading below 50 indicates contraction from the previous month. Those surveyed said the introduction of the goods and services tax (GST) had led to ‘subdued demand conditions’.

New business in the services sector also fell. The PMI survey said, ‘Of the 15% of the survey panel that reported a decline in new work, a number commented that recent government policies (GST) had contributed to sluggish demand and lower customer turnout. Four of the five categories monitored by the survey—transport & storage, consumer services, information & communications and real estate & business services—recorded reductions in new work.’

That suggests the slowdown in the services sector is not just because of supply-side disruption due to GST but due to lower demand. Recall that the September quarter GDP data had shown that growth in private sector services gross value added (GVA) had fallen from 7.4% in the June quarter to 6.7% year-on-year. The services PMI had contracted in July and August this year and the bounce seen in October has now fizzled out.

On the other hand, the manufacturing PMI for November has shown a rebound, albeit after a weak reading for October. The manufacturing survey said, ‘A combination of new order growth and a reduction in GST rates was reportedly behind the rise in overall production.’ A possible explanation could be that the revision of GST rates lower has boosted manufacturing, while the increase in tax rates as a result of GST on services has crimped demand for services.

How does private sector activity in the first two months of the current quarter compare with a year ago? The average manufacturing PMI for October-November 2017 was 51.45, compared to 56.8 in October-November 2016. Similarly, the average services PMI for October-November 2017 was 50.1 compared to 50.6 in October-November 2016. In short, the momentum in private sector activity is lower in the current quarter than in the year-ago quarter, in spite of the kick in the teeth it received from demonetisation in November last year. The accompanying chart shows the trajectory of the Nikkei India Composite Output index, which combines the services and manufacturing PMIs and is a snapshot of private sector activity in the economy. Note the ravages wrought by demonetisation and GST.

The RBI, of course, has often said that the effects of GST will be temporary and it will look through these effects in deciding policy. There are also a couple of indications in the PMI data that businesses believe the slowdown is temporary. First, both manufacturing and services firms are hiring workers, with the PMI manufacturing employment sub-index at its highest level since September 2012. And second, the November PMI surveys for both manufacturing and services show an increase in business confidence about future prospects.

Another factor that complicates matters for the RBI is the rise in input costs. The PMI numbers show higher costs in the manufacturing sector, while input cost inflation in the Indian service economy was the fastest since October 2013.

The September quarter GDP data had shown that growth in private consumption was the lowest in the last eight quarters. It is to be hoped that the slowdown in demand in the services sector mentioned by the PMI survey is the result of GST alone and not due to other, more permanent, reasons.

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