Amid the economic gloom worldwide on account of the deadly Covid-19 going global, there is some encouraging news for India. The services Purchasing Managers’ Index (PMI), which is an early gauge of activity levels in the sector, rose in February to its highest in more than seven years. The jump reflects a surge in new orders and improved export demand. Business confidence appears to have gone up in this sector. In this, India seems to have bucked a global recessionary trend. In China and Hong Kong, similar indices have slumped to all-time lows. Anxiety over Covid-19 has dampened business in various other countries, too. Australia and Japan have registered marked slowdowns, and service markets elsewhere are unlikely to escape unscathed. Against this backdrop, India’s services sector might look like a bright spot. The government may even be tempted to cite the PMI figure as fresh evidence to back its view that the Indian economy is no longer on a downtrend. Whether such a case can justifiably be made, however, is far from clear.
Caution is also warranted because PMI readings are based on a survey of businesses and their outlook for the future, and the optimism expressed by them is not always a reliable predictor of how things actually work out. What matters is actual output—which occurs once managers put corporate money where their mouth is—and the predictive power of the index in question has displayed an uneven record in India over the recent past. Though PMI trends have pointed to a recovery for some months, this has not translated into faster economic growth as recorded by official gross domestic product (GDP) statistics for the sector. Admittedly, one cannot quite compare the two, as the two metrics cover differing subsets within services. Also, the time gaps between orders placed and income generated usually varies from one market to another. Nevertheless, the wide divergence in trends makes space for scepticism. The index’s February survey may also have been conducted before the latest worries over Covid-19 surfaced. Uncertainty now looms large over the impact of the disease on the economy and it seems unlikely that services overall would be able to hold up if customers of various inessential services begin to retreat into safety mode. Travel and tourism are likely to be struck, as also allied industries such as hospitality and a host of others that depend on leisure or discretionary spending. Commercial activities that involve gatherings would probably suffer as perceptions of risk rise. This is the nub of the problem. Regardless of how bad the epidemic gets or how far it spreads, waves of fear could ripple around and compress demand.
Among services, however, the most crucial is undoubtedly the financial sector. Broader economic growth depends to a large extent on how this one performs. The story here remains disappointing, unfortunately. Credit growth has been languishing under 10%, while it arguably needs to be far higher than that for India’s economy to expand the way it did in its boom years. The country’s bad loan problem persists and bank balance sheets are yet to be cleared up, even as lenders have apparently turned risk-averse. Services account for three-fifths of the country’s GDP and if they are to form a lever that could lift everyone’s economic prospects, we need a lending revival. This may take longer if a large number of state-owned banks with varied software platforms are distracted by the internal nitty-gritties of merging operations.