(Graphic: Paras Jain/Mint)
(Graphic: Paras Jain/Mint)

PMI: Reversal in India’s services sector activity may be temporary

  • The euphoria may be short-lived as investment scenario and demand may not see a recovery in the near term
  • New exports work rose for the fifth straight month in July and the pace of growth was the fastest since this measure was introduced to the survey in September 2014

Business activity in India’s services sector reversed to an expansion in July from a contraction recorded in June. The IHS Markit Services Purchasing Managers’ Index (PMI) rose to a one-year high of 53.8 in July, from 49.6 in June.

A PMI reading above the 50-mark separates growth from contraction.

This sharp improvement was largely led by new business inflows, which grew at the fastest pace since October 2016. Anecdotal evidence suggested that new business was secured from the public and private sectors, as well as domestic and international markets, according to the survey.

New exports work rose for the fifth straight month in July and the pace of growth was the fastest since this measure was introduced to the survey in September 2014.

In a rub-off, employment indices and optimism among services provided showed month-on-month improvement in July.

That said, this euphoria may be short-lived. This is because India’s domestic consumption demand and investment scenario is unlikely to see a massive recovery in the near term. Also, on the global front, there are fresh fears with respect to the US-China trade war.

According to Ambit Capital Pvt. Ltd, both consumption and investment growth are likely to come under pressure in FY20, so a turnaround appears distant at this point in time.

“Private consumption, which accounts for 60% of India’s gross domestic product (GDP), is headed for a prolonged slowdown given the declining share of wages in GDP and given that now even corporate profits’ share in GDP is coming under pressure," it said in a report on 2 August.

Further, private investment is at best expected to remain flat in FY20 and government capital expenditure is set to contract. Also, India’s decision to steadily increase import tariffs against the backdrop of global trade growth coming under pressure is likely to hurt its exports over the next 12-18 months, said Ambit Capital.

While the Reserve Bank of India is expected to respond by loosening the monetary policy further, the measures may not be enough to stoke demand quickly.

Hence, the jury is out on whether services will bring India the cheer that it has always brought.

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