The inflation hurdle to a recovery in services
PremiumPMI survey report says business confidence among Indian service providers hit a six-month low in January
Omicron has left a scar on the Indian services sector. The seasonally-adjusted India Services Business Activity Index published by IHS Markit showed that the headline index has declined to 51.5 in January from 55.5 in December. A reading above 50 indicates expansion and below the threshold points to contraction
The steep drop in the index in January is a matter of concern. “The upturn was reportedly stymied by the intensification of the pandemic, the reintroduction of restrictions, and inflationary pressures," according to the Purchasing Managers’ Index (PMI) survey report.
View Full Image
The good part is that the pandemic’s impact has not been as severe this time as it was in the previous two waves. India’s third wave fuelled by the Omicron variant of coronavirus is said to be receding with sharp drop in new infections. The virus case count has plunged more than 40% from the late-January peak and Google’s mobility data show that trips to retail and recreation venues have turned a corner, said Miguel Chanco, senior Asia economist, Pantheon Macroeconomics. “This probably is the worst that the services PMI will get," he said.
That said, inflation remains a niggling worry. The PMI sub-index for inflation has risen to the highest level since December 2011. Higher food, fuel, material, staff and transportation costs pushed the overall rate of inflation to a decadal high. Companies have increased prices, but these have not been enough to compensate for the steep rise in input costs.
Service providers may not be able to make a meaningful comeback soon given the elevated level of inflation, according to economists. “In the near-term, the outlook for the services sector could improve as restrictions ease. Given the pent-up demand, customers may be willing to pay higher prices. However, this is likely to be a short-term phenomenon. Eventually, inflation will start pinching customers, leading to a slower growth in the services sector, with smaller and regional companies facing a greater brunt than large firms," said Madan Sabnavis, chief economist, Bank of Baroda.
Little wonder then that business confidence among service providers has taken a hit yet again, falling to a six-month low in January, according to the PMI survey report.
Meanwhile, the clamour for interest rate hikes and policy normalization is getting louder, with inflation pinching companies and consumers hard. “We suspect that the reverse repo rate will be hiked at the upcoming meeting," said Darren Aw, Asia economist at Capital Economics. The Reserve Bank of India is scheduled to meet on 9 February.
MINT PREMIUM See All
“Repo rate hikes will follow in subsequent meetings and go further than most currently expect, especially with the inflation backdrop set to turn more difficult," Aw said.
Never miss a story! Stay connected and informed with Mint. Download our App Now!!