Services PMI picks up marginally as demand improves

The expansion was on the back of a better demand environment, new business flows and output following the easing of covid-led restrictions. However, input shortage and inflationary pressure resulted in slower-than-anticipated growth, according to the IHS India Services Business Activity Index released on Friday.

Note, PMI is a month-over-month indicator. A reading of above 50 indicates expansion in business activity.

“Growth in the service sector failed to rebound as meaningfully as many would have hoped given that the covid-19 cases receded considerably from January’s new wave and restrictions were lifted,” said Pollyanna De Lima, economics associate director, IHS Markit. “New business and services activity expanded only modestly, and at the second-slowest rate since last July. Looking at the anecdotal evidence supplied by survey participants, inflationary pressures, input shortages and the local elections dampened growth,” De Lima added.

The increase in new businesses and output was below the respective long-run averages. India saw an uptick in business confidence, but firms continued to shed jobs, according to the report.

While business confidence strengthened in February due to expectations that the pandemic would retreat, the overall degree of optimism was historically muted due to concerns related to inflationary pressures and covid-19.

The increase in input costs in key sectors, such as chemicals, energy, food, fuel, labour, metal, and plastic, led to higher operating costs in February. Companies continued to pass on the additional cost burden to clients and charges were revised upwards by service providers in February.

Brent crude oil price breached the $118 a barrel mark on Thursday due to the escalating Russia-Ukraine conflict. Nevertheless, the rate of output price inflation softened to a five-month low and was below its long-run average.

“Although easing from January’s decade-high, the rate of input cost inflation remained sharp in February. That said, fewer firms passed on additional cost burdens to clients amid subdued demand conditions. Output prices rose only slightly, and at the slowest pace in five months,” she said.

According to survey participants, marketing efforts, demand resilience and new client additions boosted sales. International demand for Indian services remained subdued in February, with the rate of reduction in new businesses from abroad the fastest since last September. Employment saw a fall for the third consecutive month and the fastest since July 2021 due to weak growth of new business and a lack of pressure on capacity.

India’s retail inflation had risen to a seven-month high in January led by elevated prices of food and manufactured goods to 6.01%, breaching RBI’s upper tolerance band for the first time since June.