Business activity in India’s services sector remained in the contraction zone in October as well. At 49.2, the IHS Markit India services business activity index signalled a second consecutive decline in output. A reading above 50 indicates expansion and below that threshold points to contraction.
Subdued demand conditions, competitive pressures and a fragile economic situation were to be blamed for this. The survey showed that demand weakness was centred on the domestic market, with exporters posting an increase in international sales. That said, the upturn in external demand was modest and the slowest in four months.
As a result, confidence towards the 12-month outlook for business activity declined. The degree of optimism observed in October was among the weakest seen in the near 14-year survey history. A number of panellists were concerned about the possibility that challenging economic conditions will persist, said the report.
Sub-sector data indicated that finance and insurance and real estate and business services acted as the main drag on the Indian service economy. In these sectors, both business activity and sales contracted in October.
Commenting on the latest survey results, Pollyanna de Lima, principal economist at IHS Markit, said, “It’s somewhat worrying to see the Indian service sector stuck in contraction, as firms react to muted demand by lowering business activity. Perhaps even more concerning was the downward revision to future expectations, given the possible detrimental impact of subdued business confidence on investment and jobs. The latter already displayed its joint-weakest expansion in over two years."
Despite government’s efforts to boost demand through a series of interest rate cuts and fiscal stimulus, there isn’t much improvement in sentiments. Like their counterparts in the services sector, Indian manufacturers too remained worried about future business conditions. Latest high-frequency data such as automobile sales indicated that festive demand didn’t pick up as much as anticipated.
A study by Centrum Broking Ltd showed that the current slowdown seems to be the most protracted and severe compared to the downturns seen in the last 20 years.
“History suggests, typically after the coordinated efforts by the government and RBI, it takes on an average of at least two quarters for the economy to meet its potential target. This time, it may take longer as the world growth is also anaemic. Optimistically, we see growth in Q1 FY21 to recover to normalized levels and meet or exceed the potential," said the domestic brokerage in a report on 4 November.