Services sector contracts for third straight month in July

Hafiz N Nayla

India’s services sector activity remained in red for the third consecutive month in July as demand was hit harder in the contact-intensive sectors than manufacturing, a private survey said on Wednesday. According to data released by IHS Markit, purchasing managers’ index (PMI) for services was at 45.4 in July compared […]

India’s services sector activity remained in red for the third consecutive month in July as demand was hit harder in the contact-intensive sectors than manufacturing, a private survey said on Wednesday.

According to data released by IHS Markit, purchasing managers’ index (PMI) for services was at 45.4 in July compared to 41.2 in June. A reading below 50 indicates contraction in economic activity.

“Business activity, new orders and employment declined further, but in all cases rates of contraction moderated from June. Looking ahead, firms were pessimistic about the 12- month outlook for output for the first time in a year. The latest data also pointed to an intensification of inflationary pressures across the sector,” IHS Markit said in its report.

However, in July, manufacturing PMI posted highest growth in the last three months, after contracting for the first time in 11 months in June, as states eased lockdown restrictions. Even after the first wave of the pandemic the services sector had taken more time to recover. While the manufacturing sector was back in expansion zone in August 2020, after both sectors hit an all time low in April due to the nationwide lockdown, the services sector turned positive in October 2020.

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According to the data analytics firm, new project proposals in the services sector also fell for the third month in a row in July, though at a softer pace than in June.

In addition to domestic challenges, companies witnessed a further deterioration in international demand for services. New business from abroad decreased at a sharp pace, and the conditions had not changed from June.

Consumer services was the worst-affected, registering a fall in new orders. Contractions in output were recorded across all four categories. Transport and storage was the only sub-sector to register growth in business activity and sales. In line with the sustained decline in new work, there was a further reduction in services sector employment, which contracted for the eighth month in a row, though at a moderate pace compared to June.

“Another factor weighing on jobs was an overall view that business activity will decline over the course of the coming 12 months. Companies were pessimistic for the first time in a year. The downbeat assessment for output stemmed from concerns over the pandemic, margins and inflation,” IHS Markit added.

According to Pollyanna De Lima, associate director, IHS Markit, the current covid-19 environment continued to weigh on the performance of the service sector, which is very crucial to the Indian economy.

“July data was somewhat disappointing, with incoming new business and output falling solidly over the month, but there was at least a slowdown in rates of contraction. Uncertainty over when the pandemic will end, as well as concerns about inflationary pressures and financial troubles, dampened business confidence in July. Service providers were pessimistic towards the outlook for business activity,” she added.

Input costs increased further in July with survey participants reporting higher prices for a wide range of items such as fuel, medical equipment and raw material.

The overall rate of inflation quickened from June and outpaced its long-run average.

“While the quickest increase in input costs was recorded in the real estate and business services category, charge inflation was most pronounced in the transport and storage segment,” IHS Markit said.

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