Services drive business growth in May amid cooling manufacturing, HSBC Survey shows

Indian business growth maintained its pace in May, driven by robust expansion in the services sector, even as manufacturing activities cooled due to a slowdown in new orders and production, according to a flash survey by HSBC Holdings Plc.

Despite the manufacturing slowdown, services firms recorded a sharp increase in business activity, the steepest in four months, the HSBC Flash India PMI, compiled by S&P Global, reported.

The services purchasing managers’ index (PMI) climbed to 61.4 from 60.8 last month, while the manufacturing purchasing managers’ index eased to 58.4 from 58.8 in April. 

The composite index, which is seasonally adjusted and measures the month-on-month change in the combined output of India's manufacturing and service sectors, rose to 61.7 in May from 61.5 in April, indicating strong expansion.

This index is based on a survey of 400 manufacturers and 400 service providers. A reading above 50 shows expansion in economic activity, and a data print below that signals contraction. 

The composite PMI has now remained above 50 for 34 consecutive months.

The final data will be released next month. 

"The composite PMI ticked up further in May, recording the third strongest reading in close to 14 years, supported by a sharp acceleration in the service sector," said Pranjul Bhandari, chief India economist at HSBC.

"Additionally, the latest data showed strength in new export orders for both sectors, which rose at the fastest pace since the series started in September 2014. The level of optimism about the year ahead increased to its highest in over 11 years, resulting in firms increasing their staffing levels. However, higher input costs in both sectors led to further margin squeezes, particularly for service providers," Bhandari added.

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The data underscores India's position as one of the fastest-growing major economies. The Reserve Bank of India (RBI) expects the economy to grow at 7% in FY25, while the government's second advanced estimate pegs economic growth at 7.6% in FY24, up from 7.3% in FY23.

"The Future Output Index rose by nearly seven points in May, showing a considerable improvement in confidence surrounding near-term output prospects among Indian private sector firms," the survey said.

In April, India's consumer price index (CPI)-based retail inflation stood at 4.83%, down from 4.85% in March, when it fell below 5% for the first time since November 2023, mainly due to falling fuel prices.

While retail inflation remains above the RBI's target of 4%, it has stayed within its tolerance range of 2-6% for the eight months in a row.

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"The rate of inflation was below that seen for input costs, though outpaced its long-run average," the survey said. “The faster increase in charges was recorded in the manufacturing industry, contrasting with the trend seen for input prices.”

Meanwhile, industrial output growth slowed to 4.9% in March after rising to a four-month high of 5.6% in February. Industrial output rose 4.14% in January and 4.3% in December, following an eight-month low expansion of 2.5% in November.

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