Services PMI shows how second wave snuffed out confidence
PremiumBut even as the second wave snuffed out biz confidence, the index for prices charged has, in fact, gone up
That the sentiment index for services would plummet in May was a given as the second wave of the covid pandemic had triggered large-scale lockdowns across most states. Ergo, the fall of purchasing managers’ index (PMI) for services to an eight-month low, signalling contraction again, should not surprise.
Services PMI fell to 46.4 in May from 54 in April. A reading below 50 reflects contraction. In May, most states were under lockdown as the second wave spread rapidly across urban and rural pockets. Mobility was severely curtailed and business activity therefore saw disruptions, making the outlook uncertain.
MORE FROM THIS SECTIONSee All
View Full Image
The intensity of lockdowns has differed, and has largely been lower than the nationwide lockdown of last year. What’s more, the first wave gave some lessons and businesses have been able to adapt to the new lockdowns. Ergo, the drop in the index is not precipitous, as it was in the same month last year when it fell to 12.6. “Given a moderation in the virus caseload and partial easing of restrictions seen across many states in June, we expect the slowdown in activity to be transitory," wrote economists at Barclays Securities India Pvt. Ltd in a note.
Nevertheless, the services sector continues to be under pressure because of its contact-intensive nature. The impact is visible on employment, business sentiment and output. When businesses saw sales decline, a natural progression was to halt hiring or in some cases lay off employees. This is perhaps the most worrisome part of the second round hit to services.
“Growth of new work intakes ground to a halt in May, with companies noting the first decline in sales since September 2020," IHS Markit said in its release. There has been a broad-based decline in employment among both producers of goods and services.
With the sharp drop in services PMI, the overall composite PMI for India fell to 48.1 in May from 55.4 in April.
But even as the second wave snuffed out business confidence and prospects for employment in services, the index for prices charged has, in fact, gone up. This index is a loose gauge of services inflation. This is a problem vexing policymakers. The rise in prices has been the direct fallout of cost-push inflation. Global commodity price increases and the surge in domestic fuel prices have increase input costs for all firms.
This problem of inflation—even as the pandemic hurts a fledgling growth recovery—is what the Reserve Bank of India’s monetary policy committee would have to deal with as it meets to decide on rates and the stance. It is a foregone conclusion that the committee will bat for growth.
Never miss a story! Stay connected and informed with Mint. Download our App Now!!