PMI: A contrasting tale of 2 sectors
Premium- Activity growth in India’s service sector moved up a gear in June, surpassing manufacturing
- Inflation remains a concern for the service providers as well as the manufacturers
Business activity in India’s services sector is gaining momentum at a rapid rate. The seasonally adjusted S&P Global India Services PMI Business Activity Index rose to 59.2 in June from 58.9 in May. This is the headline index’s highest mark since April 2011. A reading above 50 indicates expansion.
The acceleration in growth was broad based across the four monitored sub-sectors, said the PMI survey report. The panellists attributed this upturn in business to ongoing improvements in demand amid easing of pandemic restrictions, capacity expansion and a favourable economic environment.
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This striking rebound in the services sector offsets the subdued growth in the manufacturing industry. The seasonally adjusted S&P Global India Manufacturing PMI fell to 53.9 in June from 54.6 in May. The headline index reading is above 50, indicating an expansion, but the latest figure was the lowest since September last year.
The services PMI is now further above the manufacturing measure than at any time since 2010, said Adam Hoyes, assistant economist at Capital Economics Ltd.
“Taken together, the surveys support forecasts for strong gross domestic product (GDP) growth in Q2 (the June quarter), and suggest that robust demand is allowing businesses in the much larger services sector to shrug off increases in interest rates and higher inflation, for now," Hoyes said. The service sector is estimated to contribute around 55% to India’s GDP growth.
Input cost inflation eased to a three-month low in June, but remained high by historical standards for service providers. A similar trend was observed for Indian manufacturers in the June survey. However, unlike manufacturers, who saw a moderation in the output prices index as well, the services output prices index increased to 53.9 in June from 53.3 in May. This is the fastest rate of price rise since July 2017.
This is the worrying part. Steep price hikes by services providers as they strive to pass on cost inflation could dampen demand. Economists at Barclays caution that tighter domestic financial conditions and a weaker global growth outlook are headwinds to the ongoing recovery in services sector.
Inflation remains a concern for both service providers and manufacturers. The services PMI report said that while companies were cautiously optimistic about the year-ahead outlook for business activity, the overall level of sentiment was well below its long-run average. Only 9% of companies surveyed forecast output growth.
However, as the third chart alongside shows, the business expectations index, or the future output index, for services has seen only a slight moderation in June. On the other hand, business optimism among manufacturers fell to a 27-month low of 50.9 in June. Further, Indian manufacturers were least confident on growth outlook compared to global peers in the manufacturing sector.
Meanwhile, even as the PMI surveys indicate some softening in cost inflation, retail inflation in India is elevated and the Reserve Bank of India (RBI) is expected to continue with its monetary policy normalization.
“The latest PMI prints indicate some softness in price pressures, but it remains above long-run averages," said Gaura Sengupta, India economist at IDFC First Bank. Consumer price index (CPI) inflation is expected to remain above RBI’s upper threshold of 6% for the majority of FY23, she said. “If there is a significant drop in price pressures which brings down the average CPI in Q4FY23, then we could see a softer rise in repo rate. However, for the next few policy meetings, rate hikes remain on the table," she said.
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