MUMBAI: Business activity in India's services sector, a key contributor to gross domestic product, saw fastest growth in a year in February. Data published by Nikkei and IHS Markit showed that Services Purchasing Managers' Index (PMI) rose to 55.3 in February from 52.8 in January. A reading above 50 indicates expansion and a sub-50 print points to contraction.
The ongoing recovery in domestic demand has driven this improvement, even as exports continue to lag, showed the survey.
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While the headline number gives a rosy picture of demand revival, a closer look reveals some unpleasant factors. Akin to manufacturers, for services providers as well, cost inflation continues to rise with the rate of inflation strongest since February 2013. Despite higher freight and fuel prices, competitive pressures prevented companies from lifting their own fees, said 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 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 in spite of ongoing growth of total new business, service sector employment fell further during 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 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, at Capital Economics Ltd said in a report on 3 March.
Of course, hopes are that as vaccination picks 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.
"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, partly because most of the low-hanging fruits have been picked, and Covid-19 case numbers 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 at Pantheon Macroeconomics in a note dated 3 March.
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