The country’s services sector activity in June contracted for the first time since May 2018 as weak sales, competitive pressures and unfavourable taxation hampered output, a monthly survey showed on Wednesday.

The IHS Markit India Services Business Activity Index fell to 49.6 in June, down from 50.2 in May, as broadly stagnant sales caused the first drop in business activity in over a year. In PMI parlance, a print above 50 means expansion, while a score below that denotes contraction.

“The latest PMI results for India bring some concerns over the sustainability of the relatively robust growth rates seen at the start of the year, and the ability of companies to create jobs,” said Pollyanna de Lima, Principal Economist at IHS Markit.

Also read:Services sector growth slows, PMI at 12 month low with 50.2 in May

In the service sector, there was an outright contraction in business activity which was prompted by broadly stagnant sales. “It’s somewhat surprising to see some companies linking subdued demand to high tax rates, two years on from the GST implementation, with the hotel tax mentioned in particular,” Lima said.

Meanwhile, the IHS Markit India Composite PMI Output Index, that maps both the manufacturing and services industry, fell from 51.7 in May to 50.8 in June — its lowest mark in over a year. “Looking at the opening quarter of fiscal year 2019-20, we see the slowest upturn in private sector output since the last quarter of fiscal year 2017-18, which dragged employment growth down to a notable extent,” Lima said.

Going forward, Indian service providers are hopeful of an improvement in demand conditions. “Services companies are hoping that some stimulus will boost demand in the coming months, translating into output growth, though confidence about the future also started to fade,” Lima said.

Experts believe that the Reserve Bank of India (RBI) will continue with its dovish stance in its upcoming policy review in August to boost slowing economic growth. In the June review, RBI had cut key lending rates by 0.25 per cent for the third time this year to spur economic growth.

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