Services PMI up sharply in June on rise in new business

India’s services sector seems to be back on track. After contracting in May, the Nikkei India Services Business Activity Index rose to 52.6 in June from 49.6 in May. This index is better known as the Purchasing Manager’s Index (PMI) and is prepared on the basis of a survey conducted among purchasing managers of over 400 private companies.

These companies belong to five sectors, namely Consumer Services, Transport & Storage, Information & Communication, Financial & Insurance and Real Estate & Business Services. An index of over 50 shows expansion and one below 50 indicates contraction. The index and subsequent report is prepared by IHS Markit.

According to the report, the rate of expansion in activity was the sharpest in a year. This was supported by the strongest rise in new business since last June. Reflecting improved demand conditions, job growth picked up from May’s five-month low. On the price front, input cost inflation remained solid overall. That said, services providers were unable to fully pass on higher input costs to price-sensitive consumers. The latest upturn points to solid growth that was the fastest since last June.

According to the report, despite an improvement in demand conditions, business sentiment dipped to the lowest since last October. While optimism was relatively weak, firms still anticipate activity to rise in the year ahead. In response to greater output requirements and new work, firms have raised their staffing levels during June. Information and communications have registered the sharpest growth in staffing levels, it added.

Since manufacturing registered the strongest growth in June, the combined (Manufacturing+Services) PMI, better known as Composite PMI Output Index, has risen to 53.3 in June from 50.4 in May. The latest reading is the strongest seen since October 2016 and is indicative of a solid rate of expansion.

Commenting on the latest PMI, Aashna Dodhia, Economist at IHS Markit, said the service economy returned to expansion in June. Encouragingly, the latest performance is the strongest seen in a year, against a backdrop of improving demand conditions, as evidenced by the fastest gain in new business since last June. In response to an improvement in demand conditions, service providers raised their staffing levels at a faster pace than in the previous survey period.

“The PMI data signalled the best improvement in the overall health of the economy since October 2016, propelled by solid growth in both the manufacturing and service economies, with the sharper rise in the former. However, overall input costs rose at the strongest rate since July 2014, and amid a weak rupee and higher oil prices, inflation may remain elevated. Given these circumstances, the chances of a further monetary policy tightening have heightened,” she said.

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