The Indian service sector dipped into contraction territory during November, following growth in the previous two months. This was matched by a reduction in new work. Panellists widely blamed the deterioration in business performance to the goods and service tax (GST). Meanwhile, cost pressures intensified during the latest survey period.
With confidence its highest in four months, companies added to their staffing levels for a third month in succession, albeit to a relatively modest degree.
Posting below the no-change mark of 50.0 in November, the seasonally adjusted seasonally adjusted Business Activity Index signalled a contraction of the service sector for the first time in three months. That said, the rate of decline wasmodest.
With growth in manufacturing production offsetting the fall in services activity, private sector output rose for the third consecutive month in November.
Reflecting a slowdown in output growth, the Nikkei Composite Output Index fell from 51.3 in October to a three-month low of 50.3 in November. This signalled a broad stagnation in private sector output in India.
Underlying data highlighted that service activity fell in response to a drop in new business during November. According to anecdotal evidence, July’s GST continued to affect businesses as it led to sluggish demand and lower customer turnout. As with the case with activity, the rate of contraction in new work was modest.
In contrast, the manufacturing sector reported growth in new work during November. Furthermore, the rate of expansion accelerated to the fastest since October 2016.
Amid ongoing reports of cash flow shortages, outstanding business rose at service providers for the eighteenth consecutive month in November. That said, the rate of accumulation was modest and the weakest since June.
Manufacturing companies reportedly faced delayed client payments, with backlogs also rising for the eighteenth month in succession.
Despite unfavourable demand conditions, service providers continued to add to their workforce numbers. That said, employment growth eased to a modest pace and further away from September's recent high.
It was a brighter picture for factory employment in November, as manufacturers raised their staffing levels at the fastest pace since September 2012 in response to stronger growth in new orders.
Input prices faced by Indian service providers continued to rise in November. In fact, input cost inflation accelerated to the fastest since October 2013. Food and fuel were reported by panellists as increasing in price over the month. Moreover, higher taxation led to an increase in overall input prices.
Indian manufacturers registered a solid increase in their average cost burdens in November. Furthermore, input cost inflation quickened to the strongest since April. Among the items mentioned as being up in price were chemicals, steel and petroleum products.
Reflecting greater cost burdens, service providers increased their average selling prices in November. Charge inflation quickened to the strongest since July, but was modest as firms were unable to fully pass on higher cost burdens to price -sensitive clients.
As was the case with service providers, manufacturing companies were restricted in their ability to fully pass on higher cost burdens to consumers amid reports of intensive competitive conditions. Subsequently, output charge inflation was marginal.
The level of business sentiment in the service sector towards the 12 -month outlook for output rose to the strongest since July. Positive projections for business prospects were attributed by panellists to improved demand conditions, enhanced marketing initiatives, and expectations of GST benefits materialising over the next 12 months. However, business confidence remained low in the context of historical data.
Aashna Dodhia, Economist at IHS Markit, and author of the report, said, ''Following modest growth in the previous two months, hopes of a sustained recovery in November waned as marked growth in the manufacturing sector was broadly offset by a downturn in the service sector. Business underperformance emanated from July’s Goods and Services Tax (GST) which contributed to sluggish demand and lower customer turnout, according to anecdotal evidence.
The ray of sunshine in the latest PMI dataset was the resilience of the labour market as firms continued to raise their workforce numbers for the third consecutive month, resonating with stronger business sentiment across the service sector.
That said, cost pressures further intensified at service firms (fastest inflation since October 2013), which could constrain output growth in the nearterm and reduce any central bank appetite to reduce interest rates.''
