Services sector in India expanded in the month of May, at the highest rate in 11 years, led by substantial pick-up in new business growth amid demand recovering following the reopening of the economy after COVID-19 lockdowns, findings of a monthly survey show. 

The seasonally adjusted S&P Global Services PMI Business Activity Index stood at 58.9 in May, up from 57.9 in April. Anecdotal evidence suggested that the upturn in output reflected better underlying demand and strong inflows of new work and service providers mentioned that demand continued to strengthen following the lifting of pandemic-led restrictions, the survey said.

Hot inflation underpin business confidence

The growth in the services sector is despite ‘unprecedented’ high inflation impacting business confidence, the survey findings showed. Last month was the twenty-third successive month of rising input prices for service providers.

“Inflation outlook appeared to have worsened as input prices rose at the sharpest pace in the survey history. Services firms again reported substantial pressure from food, fuel, input, labour and transportation costs,” Pollyanna De Lima, Economics Associate Director at S&P Global Market Intelligence said. “Output charge inflation softened only marginally from April, being the second-highest in just under five years, as several companies mentioned the need to transfer mounting costs through to clients,” she added.

“Consumer Services remained the brightest spot of the service economy, posting the strongest increases in both new business and output during May. It was here too that the steepest rate of input cost inflation was seen,” De Lima said in the statement.

Companies continue to pass high prices onto customers

Service companies continued to transfer rising cost burdens through to customers by upping their selling prices with the aggregate cost burdens rose at the fastest rate since March 2011. This is a little-change from April as overall rate of charge inflation was the second-highest in close to five years, the survey findings showed. In comparison to the services sector, there was a mild slowdown in cost inflation in the manufacturing industry.

However, service providers refrained from taking on additional workers in May and there was a renewed but only marginal decline in employment, survey said.

Rising inflationary pressure has been worrying the government as well as the central bank. In the next week’s RBI monetary policy, economists expect RBI to hike interest rates to control the hot inflation. Economists see inflation to remain above the central bank’s upper threshold of 6 per cent this year.