IHS Services Business Activity Index contracts to 46.4 in May
The Indian economy has started to heave as it is buffeted by the second Covid wave. On Thursday, there was more bad news for the Modi government when a closely-watched gauge of economic activity — the IHS Services Business Activity Index — contracted for the first time in eight months.
The index stood at 46.4 in May compared with 54 in April — a sudden, alarming slide — sending grave signals to the country’s policy makers who had turned gung-ho after the NSO said that the economy had shown a 1.6 per cent real GDP growth in the January-March quarter.
Worse, the composite PMI index — manufacturing plus services — also sank to 48.1 from 55.4 in April. A print above 50 means expansion, while below 50 denotes contraction.
The services sector activities slumped amid renewed decline in new work intakes because of the escalation of the pandemic and the reintroduction of restrictions.
“The intensification of the Covid-19 crisis and associated restrictions suppressed domestic and international demand for Indian services. Total sales decreased for the first time in eight months, while the fall in external orders was the most pronounced since last November,” said Pollyanna De Lima, economics associate director at IHS Markit.
“The PMI reading for May adds to evidence elsewhere that the damage from the second virus wave has not been as severe as when the pandemic first struck last year. But with restrictions likely to be lifted slowly this time around, the recovery beyond the current outbreak looks set to be more gradual,” Darren Aw, Asia economist, Capital Economics, said.
The international demand for Indian services also worsened, with new export business falling at the quickest rate in six months. The drop was attributed to international travel restrictions and business closures.
On the job front, pandemic-related worries and falling sales led services companies to reduce workforce numbers again during May.
“Amid efforts to keep a lid on expenses given the deterioration in new business, services companies reduced payroll numbers to the greatest extent in seven months. Concerns towards the outlook, evidenced by a dip in sentiment, could prevent job creation in near-term,” Lima noted.
On the inflation front, amid reports of higher prices for a wide range of inputs and fuel, operating expenses at services firms continued to increase in May. “The overall rise in cost burdens was historically sharp as prices for a wide range of inputs and fuel continued to surge. Only a small proportion of firms shared additional cost burdens with their clients, resulting in only a marginal increase in service fees,” Lima said.
The composite PMI output index, which measures combined services and manufacturing output, was down from 55.4 in April to 48.1 in May, pointing to a renewed decline in private sector activity across India.
Aggregate new orders decreased for the first time in nine months and private sector jobs fell for the 15th month in succession.
The next bi-monthly monetary policy review of the Reserve Bank of India (RBI) is scheduled to be announced on Friday. Experts believe, with the economic outlook remaining uncertain in light of the continuing pandemic, the monetary policy stance of the RBI is likely to remain accommodative.