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Services need state help too

  • The sector performed better in June than May, but still remains deep in contraction territory. This suggests it may take longer to recover than other sectors

Encouraging signs of recovery in India’s manufacturing sector had led to some optimism of a post-lockdown revival elsewhere in the economy as well. Given the services sector’s performance in June, such hopes seem premature. The Nikkei-IHS Markit purchasing managers’ index for services stood at 33.7 in June. Any reading below 50 indicates a contraction in activity, while one above means an expansion. June’s reading is much better than May’s 12.6, but it’s still far from growth territory.

In other words, an improvement there has been, but not to the extent we would have hoped. The sector is still contracting, although at a slower pace. Clearly, the unlocking of the country has had only a modest effect on services, and getting back to pre-covid levels of activity may take longer for this sector than the rest of the economy. Indeed, the risk of the infection spreading remains high. In such an environment, services such as tourism, hospitality or dining are unlikely to spring back. Unfortunately, the number of cases in India is still rising rapidly, and until the infection graph flattens out, a robust recovery will elude us.

This doesn’t bode well for the overall economy, since services contribute about 60% of India’s gross domestic product. To compensate, government spending will have to do the heavy lifting. New Delhi’s finances are constrained, but it should revisit both its budget arithmetic and expenditure schedule. It could advance outlays intended for later in the year and spend on things that could boost services. The sector should not get left behind.

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