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The Omicron variant has left its scar on the Indian services sector. The seasonally adjusted India Services Business Activity Index published by IHS Markit showed that the headline index has fallen to 51.5 in January 2022 from 55.5 in December 2021.
A reading above 50 indicates expansion and below this threshold points to a contraction.
“The upturn was reportedly stymied by the intensification of the pandemic, the reintroduction of restrictions and inflationary pressures," said the PMI survey report.
The good part is that unlike in the previous two waves, the impact of the pandemic has not been as severe this time. “The complete PMI data for January confirm that the direct impact of the Omicron wave and related restrictions was fairly modest, compared with previous outbreaks," said Miguel Chanco, senior Asia economist, Pantheon Macroeconomics in his note on 3 February.
Further, India’s third wave is said to be receding with a sharp drop in new infections. Chanco points out that the virus case-count has plunged by over 40% from the late-January peak, and Google’s mobility data show that trips to retail and recreation venues have turned a corner.
“More importantly, this probably is the worst that the services PMI will get," he added.
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. Service providers have taken price hikes, but not adequate enough to compensate for this steep rise, showed the PMI report.
Economists point out that in the backdrop of elevated inflation, service providers may not be able to make a meaningful comeback soon.
“In the near-term, the outlook for the Indian services sector could improve as restrictions ease. Given the pent-up demand, customers may be willing to shell out 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 higher brunt than large firms," said Madan Sabnavis, chief economist at Bank of Baroda.
Little wonder then that the business confidence among Indian services providers has taken a hit yet again, falling to a six-month low, showed the PMI survey.
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