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PMI: Muted demand outlook forces services providers to absorb input cost hike

According to the PMI survey, while Indian services firms were optimistic regarding the 12-month outlook for business activity, the overall level of positive sentiment fell to the lowest since last October. The escalation of the pandemic was the main drag on confidence. (Mint)Premium
According to the PMI survey, while Indian services firms were optimistic regarding the 12-month outlook for business activity, the overall level of positive sentiment fell to the lowest since last October. The escalation of the pandemic was the main drag on confidence. (Mint)

  • The PMI survey report pointed out that companies reported a sharp rise in expenses in April, which they linked to higher prices for food, freight, fuel and a wide range of other items

Business activity in India's services sector, which is a key contributor to economic growth, slipped to a three-month low in April. According to the latest data by Nikkei IHS Markit, the Services Purchasing Managers' Index (PMI) fell from 54.6 in March to 54 in April. A reading above 50 indicates expansion and below the threshold points to contraction.

Although PMI remains in the expansion zone despite rising covid-led restrictions, the outlook for services sector remains muted. So, despite the steep elevation in input costs, service providers have not passed on the burden of increased costs to customers. The PMI survey report pointed out that companies reported a sharp rise in expenses in April, which they linked to higher prices for food, freight, fuel and a wide range of other items. The overall rate of input cost inflation was the strongest seen in close to nine-and-a-half years, added the report.

While some firms lifted their selling prices in April amid the pass-through of rising cost burdens to clients, but 98% of companies left fees unchanged due to efforts to secure new work and remain competitive.

As a result, overall charges increased only marginally in April. While the strongest increase in input costs was noted in the consumer services category, the sharpest rate of output charge inflation was evident at transport and storage companies, showed the survey.

Further, an IHS Markit economist highlighted that the gap between rates of inflation for input prices and charges was one of the widest since the global financial crisis.

Little wonder that these factors have weighed on the business sentiment of service providers. While Indian services firms were optimistic regarding the 12-month outlook for business activity, the overall level of positive sentiment fell to the lowest since last October. The escalation of the pandemic was the main drag on confidence, said the survey.

Counterparts in the manufacturing sector are facing input cost pressures, however, economists say that they are better placed than services providers to raise selling price.

According to Rahul Bajoria, chief economist at Barclays India, the extension of movement curbs till end June could cost the economy an estimated $38.4 billion. Barclays has recently reduced its India gross domestic product growth projections, and now sees the economy growing by 10% year-on-year in FY21-22 from 11% earlier.

"With virus cases still extremely high, there is every possibility of a further tightening in state-level restrictions beyond this month. That would weigh heavily on services activity in particular, while the hit to incomes and need for social distancing will more broadly weigh on demand," said Darren Aw, Asia economist at Capital Economics Ltd.

"The clearest consequence from all of this is that RBI will not be in any rush to withdraw policy support anytime soon," Aw added.


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