Worrisome signs of slowing services segment with mixed indications from some parts
The services sector, which is more than half of India’s production base, slowed sharply in the last two years: relative to the 2010-11 peak (9.2%), growth rates dropped three points as the sector decelerated to grow just 6.2% in 2012-13 and 2013-14 (see table). Much of this slowdown was concentrated in the trade, hotels, transport and communication category where the pace decelerated to one-fourth the rate of its growth in 2010-11; construction slowed thereafter. So it was somewhat reassuring to note signs of revival in some of the services’ components in the first quarter GDP numbers (April-June 2014), although the sector’s growth as a whole matched the previous year’s pace, or 6.6%. Expectations were that the revival would strengthen ahead as other production in other sectors of the economy gathered pace.
So it is with some concern that we note the slowing trend in services that the HSBC’s Services Purchasing Managers’ Index pointed to for the month of October. This index, which tracks variables like sales, employment, inventories and prices, decreased steeply to 50 points in October 2014 from 51.6 in September, a six-month low. Beneath this stagnation, the fall in business activity was the quickest in hotels & restaurants category; best performing sub-sector was post & telecommunication. The stagnation in October was underpinned by weaker growth of new business, indicating slower services’ output growth ahead.
This trend is buttressed by the quick deceleration in services’ tax revenues in the past three months (see chart). Growth of gross service tax revenues, which averaged 21% monthly in the April-June quarter, fell steeply by one-third to average 7.7% monthly in July-September. The drop in service tax revenues compounded in October—revenue collections have grown just 1.2%, a sixth of the measured growth rate in the recently concluded quarter. And the cumulative growth of services’ tax collection over April-October period is far slower at 10.9% in comparison to the 16.8% equivalent growth clocked in 2013-14.
Does this augur a further slowdown in the services sector? What are the prospects for the sector’s growth ahead? A close scrutiny of trends so far reveals a mixed picture, with more pointers to the downside than otherwise.
To start with, government spending, which constitutes the bulk of community, social & personal services category in services’ output, is set to grow more slowly in the year’s second half as tax revenues lag behind projected targets, notwithstanding lower oil prices and subsidy expenditures. So the support rendered by this segment’s 9% year-on-year growth to the overall increase in services’ output in 2014-15Q1 is unlikely to accord a similar boost in the forthcoming period.
The slowdown in financing, insurance, real estate & business services component, which moderated to 10.4% growth in 2014-115Q1 relative to its 12.9% growth in 2013-14Q1, also appears unlikely to reverse that trend. Looking at the evolution of growth trends in some constituents like banking and insurance industries, the chances of its pick-up in the July-September quarter, and perhaps even in the October-December quarter, seem low at this point. Although scheduled commercial banks’ deposit growth in April-October 2014 averaged 13.8% monthly, a bit more than the matching 13.3% last year, credit growth is down two points at 12.2% (April-October, 2013—14.3%). Growth of the insurance industry has weakened too. According to IRDA data, life insurers (24 firms) saw a 2% decline in new business premium collections in April-September 2014 relative to matching previous year’s period. It remains to be seen if there is any pick-up in this segment in the coming months.
Other indicators reveal somewhat improved picture up to October. For instance, goods handled at ports grew 4.6% in April-October 2014, against an annual 1.8% growth in 2013-14. Telecommunications (cellular) growth was a robust 10% in June-August 2014, way higher than the sub-1% growth in the same period last year. Passenger growth, domestic and international, has been higher too, growing 11% in 2014-15: H1 against an annual 8.3% growth in 2013-14. Likewise, air cargo carried grew 19% in April-September compared to last year’s annual pace of 10.2%. Tourist arrivals grew nearly double the rate last year in April-October 2014, or 11.4%. Whereas growth in medium and heavy vehicles, which contracted nearly 50% from its 2011-12 peak (3 lakh units), rose 2% in April-October 2014 (1.22 lakh units), helped by generous offers; it is predicted to gain momentum in the coming months.
Goods’ traffic movement at railways grew 4.8% in April-October 2014, marginally lower to last year’s 4.9% equivalent growth. And there are recovery signs in the hospitality segment—average room occupancy rate in July-September was higher at 56.5% against comparable 53.2% last year, while hotel occupancies were 58.2% in January-September 2014, against an equivalent 56.4% last year according to reported STR Global figures. Here too, it isn’t easy to separate the effects of discounted room rates.
Whether the above signs strengthen in the forthcoming period or weaken depends significantly upon how other economic segments such as exports, industrial production and agriculture perform as each of these is connected with varying intensity to the services sector. Available data so far is not very encouraging in this regard; for example, the exports’ contraction last month, feeble growth of industrial output and the likely slower growth of agriculture this year. In summary, it seems that indications of a sustained turnaround in the services sector are yet to emerge. The forthcoming GDP data for July-September quarter, to be released November 28, will shed further light in this regard. While services’ growth performance in the first half of this year will be known soon, the second half still seems up in the air.
Renu Kohli is a New Delhi-based macroeconomist