Akin to manufacturers, for services providers as well, cost inflation continues to rise. The PMI survey showed that rate of inflation accelerated to the strongest since February 2013
Business activity in India’s services sector, a key contributor to gross domestic product, saw the fastest growth in a year in February.
Data published by Nikkei and IHS Markit showed that the Services Purchasing Managers’ Index (PMI) rose to 55.3 in February from 52.8 in January. A reading above 50 indicates expansion, and below the threshold points to contraction.
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The ongoing recovery in domestic demand has driven this improvement, even as export demand continued to lag, showed the survey.
While the headline number gives a rosy picture of demand revival, there are some unpleasant factors. Akin to manufacturers, for service providers as well, cost inflation continues to rise with the inflation rate at its strongest level since February 2013. Despite higher freight and fuel prices, competitive pressures prevented companies from increasing their fees, showed the survey report.
“With normalcy resuming, inflation would make a comeback—this was known. But the pace at which commodity prices are rising is worrying. Despite high competition, companies not passing on the burden of increased costs mirrors their scepticism about the sustainability of demand," said an economist with a domestic brokerage house, requesting anonymity.
Another factor that could weigh on demand momentum for both services and manufacturing is the grim employment situation. The PMI report said that despite the ongoing growth of new businesses, service sector employment fell further in February. A number of companies suggested that the pandemic restricted labour supply. For the third month in a row, Services PMI’s employment sub-index remained in the contraction zone in February.
“The recent flare-up of covid cases in Maharashtra highlights the risk of targeted lockdowns, especially while vaccination progress remains relatively slow. And even if and when the virus is finally brought under control in India, the scars inflicted on the labour market won’t be easy to mend," Darren Aw, Asia economist, Capital Economics Ltd, said in a report on 3 March.
Of course, hopes are that as vaccination picks up pace, covid-led restrictions would ease, making way for a full-fledged recovery. But considering India’s large population, it could take longer-than-anticipated.
“(February was) the best month in the post-lockdown era, but this could be as good as it gets. Overall, though, reopening stimulus is unlikely to be as effective in boosting momentum as it has been in the past, because most of the low-hanging fruits have been picked, and covid cases are rising once again. More broadly, we are starting to see clear signs that pent-up demand is close to being exhausted," said Miguel Chanco, senior Asia economist, Pantheon Macroeconomics, in a note dated 3 March.
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