Home >Markets >Mark To Market >Services PMI shows Unlock 1 brings some relief, but revival is far away

With the lockdown having relaxed considerably in most parts of India, barring the big cities, economic activity is slowly picking up.

One sign of this is the uptick in purchasing manager’s indices (PMI) for services and manufacturing last month.

Graphic: Satish Kumar/Mint
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Graphic: Satish Kumar/Mint

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The headline services PMI number came in at 12.6 for May, up from the historic low of 5.4 recorded in April. A reading below 50 denotes contraction, while above 50 shows expansion in activity. This bounce was expected as lockdown restrictions were eased during the second and third phases.

Small shops and even malls have now been allowed to open for business, provided they are not located in containment zones. In fact, from June onwards, excluding big cities, businesses in most regions are expected to start operations. Hence, the PMI is likely to show sharp improvements in the coming months as well.

But before we get our hopes up, there are some sombre signs too in the services PMI.

Sentiment hasn’t perked up at all. “Output expectations for the coming 12 months slumped to their most negative since records began in December 2005, amid forecasts of prolonged economic weakness domestically and overseas," said IHS in its release.

In other words, companies are not hopeful of a recovery yet. This pessimism may dim employment prospects as well. While the latest data from private think tank Centre for Monitoring India’s economy (CMIE) showed that India added more jobs in May than in April, the unemployment rate continues to be high at 23.48%.

Add the fact that the services sector is labour-intensive and also requires more social interactions than manufacturing. What’s more is that both the ambit and demand for services are far wider and stronger in cities than other regions. Since most big cities are still under a strict lockdown, the services segment is not likely to show a quick revival.

“While we anticipate that June will see better performance on account of the calibrated reopening and a return to normal for several parts of the country, underlying weakness is likely to persist for some time," Rahul Bajoria, senior economist, Barclays Bank Plc., wrote in a note.

Economists are expecting the economy to contract 4.5-7.0% in the current fiscal year. Most economists said without fiscal support, even a modest recovery expected in the second half would become a challenge.

“There will be a need for the government to step in again with demand stimulus, because you cannot expect the private sector to get up and start running again," said Sonal Varma, economist, Nomura Financial Advisory and Securities (India) Pvt. Ltd, in a webinar on Tuesday.

Varma estimated a contraction of 5.2% in FY21, with at least two quarters of deep contraction.

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