Strong demand pushed services sector activities to the highest since April 2011 in June, even as cost pressures remained stubbornly high, according to the seasonally adjusted S&P Global India Services PMI Business Activity Index. For the eleventh straight month, the services sector witnessed an expansion in output, and seemingly contributed in good measure to economic expansion in April-June quarter.
However, high inflation has apparently started impacting the manufacturing sector. Last week, the index for manufacturing showed the country’s factory output expanded at its slowest pace in nine months in June as elevated price pressures continued to dampen demand & output and business confidence fell to its lowest in over two years.
Separately, data released by the industry ministry last week showed that growth in the output of eight core infrastructure sectors scaled a 13-month peak of 18.1% in May from a year earlier, partly aided by a favourable base due to the second Covid wave.
Manufacturing was on a solid footing in June quarter, as it has been above the 50-level separating growth from contraction for a year. The sector displayed “encouraging resilience in the face of acute price pressures, rising interest rates, rupee depreciation and a challenging geopolitical landscape,” according to the Purchasing Managers’ Index, compiled by S&P Global.
“Demand for services improved to the greatest extent since February 2011, supporting a robust economic expansion for the sector over the first quarter of the fiscal year 2022-23 and setting the scene for another substantial upturn in output next month,” said Pollyanna De Lima, Economics Associate Director at S&P Global Market Intelligence.
The upturn stemmed from ongoing improvements in demand following the retreat of pandemic restrictions, capacity expansion and a favourable economic environment. Firms were able to secure new orders despite charging more for their services. June data showed the fastest rise in selling prices since July 2017, as several companies sought to transfer part of their additional cost burdens to clients. “Cost pressures in the service economy remained stubbornly high in June, despite easing to a three-month low. With companies retaining significant pricing power, owing to robust demand conditions, output charge inflation climbed to a near five-year peak,” Lima said.
According to the survey, unrelenting inflation continued to concern businesses, which were cautiously optimistic about the year-ahead outlook for business activity.
On the job front, some companies responded to capacity pressures by hiring additional staff in June, but the vast majority (94%) left payroll numbers unchanged. Overall, services employment rose marginally, following a decline in May.
Meanwhile, the S&P Global India Composite PMI Output Index — which measures combined services and manufacturing output — was at 58.2 in June, a slight change from 58.3 in May.
The core sector grew at a decent pace of 8.1% in May from the pre-pandemic level (same month of 2019), as all the constituents, barring crude oil, showed improvements. However, sequentially the month-on-month uptick in May was relatively modest (2.6%) across the eight infrastructure sectors. The decent performance of the core industries will brighten the prospects of the index of industrial production (IIP), which is estimated to record double-digit expansion in May (according to an Icra estimate, it could be as high as 16-19%). The core industries make up for 40.3% of the IIP. It also suggests an industrial recovery is gradually taking root.