The PMI survey showed that input prices continued to increase, with participants reporting higher food, fuel and staff costs. (Reuters)
The PMI survey showed that input prices continued to increase, with participants reporting higher food, fuel and staff costs. (Reuters)

Despite dull demand, services firms increase prices to protect profits

  • Prices charged for services shot up to a 17-month high, but were still below the long-run average
  • The softer growth in sales and new work orders for services firms shouldn’t be surprising in the wake of the ongoing consumption slowdown

Constrained business activity in India’s manufacturing sector has spilled over to services. The IHS Markit Services Purchasing Managers’ Index (PMI) fell to 52.4 in August, from July’s year-high 53.8. A reading above 50 indicates expansion, while one below that threshold indicates contraction.

The softer growth in sales and new work orders for services firms shouldn’t be surprising in the wake of the ongoing consumption slowdown.

The PMI survey also showed that input prices continued to increase, with participants reporting higher food, fuel and staff costs. “That said, the overall rate of inflation softened in August and was negligible in the context of past survey data. Information and communication was the only monitored category in which cost burdens did not rise," said the survey report.

To guard against the detrimental effect of rising costs on margins, services companies raised their selling prices again in August. As the chart alongside shows, prices charged for services shot up to a 17-month high, but were still below the long-run average.

“The weaker PMI readings for India’s service sector match the trend in the manufacturing industry, bringing unwelcome news of a cooling economy halfway through the second quarter of fiscal year 2019-20. Despite signals of slower growth, the survey data indicated that private-sector companies maintained some pricing power, particularly service providers, who hiked their charges to the greatest extent in nearly one-and-half years," said Pollyanna de Lima, principal economist at IHS Markit.

Meanwhile, the composite PMI readings for August showed that business sentiment among service providers and manufacturers was upbeat. Composite indices are weighted averages of comparable manufacturing and services indices.

Companies operating in both these industries believe that supportive public policies can help shift the growth momentum into higher gear in the coming 12 months.

Following the June quarter’s disappointing gross domestic product data, the clamour for interest-rate cuts has got louder. Also, there are expectations of increased government spending to revive economic growth.

However, given the contained fiscal space, it remains to be seen how the government tackles this part-cyclical, part-structural slowdown.

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