India’s largest contributor to gross domestic product (GDP), the services sector, is back in expansion mode after February, as the Purchasing Managers’ Index (PMI) for services reached 54.1 in October, against 49.8 in September. However, the bad news is that just like in manufacturing, services too saw a decline in employment.
Th services sector contributes around 55 per cent to GDP.
The latest reading of PMI pointed to a solid rate of growth in output that was stronger than its long-run average, says IHS Markit, the economic research agency, which prepares the index based on compilation of responses from questionnaires sent to a panel of around 400 service sector companies. A diffusion index is calculated for each survey variable. The indices vary between 0 and 100, with a reading above 50 indicating an overall increase compared to the previous month, and below 50 an overall decrease.
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According to Pollyanna De Lima, Economics Associate Director at IHS Markit, it is encouraging to see the Indian services sector joining its manufacturing counterpart and posting a recovery in economic conditions from the steep deteriorations caused by the Covid-19 pandemic earlier in the year. While a revival of the manufacturing industry began in August, only now has the services sector started to heal. Service providers signalled solid expansions in new work and business activity during October. They were also more upbeat about the outlook, though hopes of output growth in the year ahead were pinned on a Covid-19 vaccine.
“Service providers noted another decline in employment, but anecdotal evidence suggested that efforts to hire had been hampered by labour shortages. Survey participants indicated that workers on leave had not returned and that a widespread fear of Covid-19 contamination continued to restrict staff supply,” she said.
A positive reading for the services sector follows PMI for manufacturing (which has nearly 15 per cent share in GDP) jumping to a decade high of 58.9 in October. Both data show re-opening of the economy, coupled with festivals, giving a fresh lease of life to the economy. Though the government is upbeat about the latest numbers and hopes the trend will continue, experts do not share such optimism, saying the present optimism is just pent up demand.
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Meanwhile, on Services PMI, IHS Markit said services companies reported an increase in new work intakes, which they attributed to successful marketing efforts and strengthening demand. The upturn in bookings was solid and ended a seven-month sequence of contraction. Underlying data indicated that the domestic market was the key source of new business gains, as new orders from abroad declined further. The deterioration in international demand for Indian services was the slowest since March, but nevertheless sharper than any recorded prior to the Covid-19 outbreak.
“Amid reports of workers on leave failing to return and difficulties in hiring staff due to the coronavirus, services employment decreased again in October. The pace of job shedding was solid and matched that recorded in September. Furthermore, payroll numbers contracted across the five monitored sub-sectors,” it said, while adding that as a result of falling employment and rising orders, backlog of work increased. Despite being solid, the overall rate of accumulation softened to a four-month low.