India’s Services Activity Contracts After Three Months In May

Activity in India’s dominant services sector contracted for the first time in three months in May due to broad stagnation in new business orders. Employment growth also slowed to its weakest pace since December.

The Nikkei India Services Business Activity Index fell to 49.6 last month from 51.4 in April, according to a statement by research firm IHS Markit, which compiles the index. A reading below 50 indicates contraction in activity, while a number above it signals expansion. Services activity in the country fell below the 50-point-mark for the first time since February, when the Index reading stood at 47.8.

Weak demand conditions led the output to decline, with inflation picking up from April’s low, the research firm said. Rising input cost coupled with weak demand restricted service providers from passing cost burden to clients.

The Nikkei India Composite PMI Output Index also declined to 50.4 in May from 51.9 in the previous month. The Index remained above the 50-point-mark mostly due to modest growth in the manufacturing sector, outweighing the decline in services activity.

Albeit at a slower pace, new businesses in the manufacturing sector rose for the seventh consecutive month. Manufacturers also raised their payroll numbers in May, while job creation eased.

Going ahead, business confidence remains upbeat, with inflationary pressures providing a setback. The Reserve Bank of India too had flagged off upside risks to inflation, in its April monetary policy meet, from strengthening aggregate demand, fiscal slippage and firming of global crude oil prices.

IHS Markit statement noted that companies faced higher cost burdens for the 32nd consecutive month. That does not augur well for the sector that contributes about 60 percent to India’s $2.3-trillion economy.