Services sector activity shrinks in November

CHENNAI: Indian economy may not be out of the woods yet. A day after Fitch Ratings lowered its growth estimate for Indian economy, saying the rebound in economy appears to be weak, the widely tracked Nikkei purchasing managers’ index (PMI) on Tuesday showed that the services sector slipped into the contraction zone in November. The decline, the first time in three months, signals that the Indian economy may take time to grow in strength, a concern expressed by Fitch, too, while revising its growth forecast for the current fiscal downwards from 6.9 per cent to 6.7 per cent on Monday.

Services PMI for November fell to 48.5 points compared with 51.7 points in the previous month. The reading for November was the lowest since August. In PMI lexicon, a print above 50 means expansion and a score below that denotes contraction.

In contrast, the index for manufacturing announced last week had indicated robust growth in the manufacturing sector during November. What it means is that while manufacturing may have recovered, all is not well in services where demand decides the fortunes of the sector.

According to Aashna Dodhia Economist at IHS Markit and author of the report, India’s services sector activity slipped into the negative territory during November in the wake of the implementation of the goods and services tax, which may have led to sluggish demand and lower customer turnout due to higher prices. “Cost pressures further intensified at service firms (fastest inflation since October 2013), which could constrain output growth in the near term and reduce any central bank appetite to reduce interest rates,” Dodhia pointed out.

The Nikkei Composite Output Index, which maps both manufacturing and services activity, too fell from 51.3 in October to a three-month low of 50.3 in November, signalling a broad stagnation in private sector output in India.

Notably, despite unfavourable demand conditions, service providers continued to hire people as the level of business sentiment in the service sector for the next 12- months rose at the strongest pace since July.