Services Sector Activities Slump into Contraction Zone in May

India’s services sector activities slumped into the contraction territory for the first time in eight months, driven primarily by the movement restrictions slapped across major parts of the country in the wake of the second Covid wave.

The seasonally adjusted India Services Business Activity Index fell to 46.4 in May, down from 54 in April, as the pandemic caused renewed decline in new business and output. In purchasing managers’ index (PMI) parlance, a print above 50 means expansion, while a score below 50 denotes contraction.

“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.

International demand for Indian services also worsened, with new export business falling at the quickest rate in six months, the study said. It attributed the decline 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 in 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 the 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 services 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.

On the macroeconomic front, India’s economy contracted by less-than-expected 7.3 per cent in the fiscal year ended March 2021 after growth rate picked up in the fourth quarter, just before the world’s worst outbreak of Coronavirus infections hit the country.

The next bi-monthly monetary policy review of the Reserve Bank of India (RBI) is scheduled to be announced on June 4. 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.