Home/ Economy / Revved-up services sector can drive inflation out of control

While India’s headline inflation is finally showing signs of easing, the country’s services sector is seeing a demand rebound- and higher prices to match—after two years of pandemic-induced slump.

With strong demand, service providers have passed on the surge in input prices and operational costs to clients.

Graphic: Mint
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Graphic: Mint

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Economists warned that services inflation would remain elevated and stressed that the central bank should focus on the services segment in addition to the overall headline inflation rate, given the services sector represents a quarter of the Consumer Price Index (CPI).

In November, key services such as air transport, monthly maintenance, and porter charges saw double-digit inflation, while school bus service, conveyance expenses, and photography inflation quickened to above 9%.

“After two pandemic-constrained years, demand for contact-intensive services has surged in recent quarters, underpinning a review of prices, possibly after a long lag. We remain cautious that relatively robust demand could keep inflation sticky for this segment going forward," Aditi Nayar, chief economist, ICRA said.

Although CPI inflation in India has been slowing, the recent surge in services costs could potentially push headline inflation back above the central bank’s upper tolerance band of 6%. It is crucial for the Reserve Bank of India (RBI) to monitor prices closely and take action to maintain price stability as inflation has dropped within RBI’s tolerance band in November after 10 months.

“Demand has been very strong after the pandemic subsided last year, and that is pushing up services inflation. RBI will have to look at inflation section-wise and not the entire headline number alone. The headline inflation has declined largely due to the easing vegetable prices," said Abheek Barua, chief economist at HDFC Bank.

He added that high service sector inflation could also be attributed to the resetting of supply after the pandemic-led disruption.

“A lot of hotels were forced to shut down that impacted the restaurant and hospitality sector… during the pandemic, teachers were laid off, and they are yet to come back. Schools shut, and there was a shift to online teaching, which was not easy for many teachers to adapt to. So, in the process of adjustment, there has been a shortage of labour supply in the service sector," said Barua. He added that while inflation in the healthcare sector has declined following the pandemic, the IT sector is a different story altogether. “Models are undergoing a rapid change. Erratic changes in the IT sector are having an impact," Barua said.

Inflation in hospital charges remained nearly steady at 6.06% in November from 6.02% in August. However, airfare (economy) inflation spiked from 2.92% in August to 12.72% in November. School and college tuition fees, which saw inflation at around 2.89% in January, accelerated to 4.19% in May, 6.82% in August and touched 7.14% in November. Inflation pertaining to barber and beautician services rose from 4.31% in May to 5.92% in August and 6.57% in November.

Queries emailed to the finance ministry and the chief statistician of India on Thursday remained unanswered till press time.

As services were the last sector to recover, globally, the inflation is shifting from goods to services, said economists.

“With demand, the bandwidth to pass on the prices increases, and that is visible across the spectrum. Services have been the last ones to recover. It is not an Indian phenomenon. There is a shift from goods inflation to services inflation. It has been a global phenomenon. Services inflation will remain high for a while, and a lot depends on the factors that we don’t control, such as the crude oil prices and the weather that will impact food prices. There is pressure on services because of the high demand for services," said D.K. Joshi, chief economist at Crisil.

Devendra Kumar Pant, chief economist at India Ratings and Research, concurred that service providers were earlier unable to pass on the higher input cost to consumers due to muted demand, which has now changed. “Services took a beating during the pandemic and there was no demand for the same, and as a result, the supplier did not have the pricing power. With the recovery we are seeing now, demand is improving, and now suppliers have the pricing power, which is reflected in rising prices for services," Pant said.

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Dilasha Seth
" Dilasha Seth is a journalist reporting on macroeconomic policy for the last 11 years. She writes extensively on issues including international trade, macroeconomic data, fiscal policy, and taxation. At Mint, she reports on trade deals that India is signing besides key policy decisions of the Ministry of Finance. She closely tracked and covered the transition to the goods and services tax (GST) regime in 2017 and also writes on direct tax-related issues. In the past, she has worked with Business Standard and The Economic Times. She is based in Bangalore."
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Updated: 06 Jan 2023, 09:12 AM IST
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