The services sector witnessed a slowdown in May as the Nikkei India Services Business Activity Index fell to 49.6 from 51.4 in April. This contraction is the first in three months. This index is better known as the Purchasing Managers’ 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 over 50 shows expansion, and a figure below 50 indicates contraction. The index and subsequent report is prepared by HIS Markit.

According to the report, business activity decreased in May, thereby, ending a two-month sequence of expansion. Roughly 16 per cent of the respondents registered a decline in output, which Indian service providers linked to competitive conditions. That said, the rate of contraction was marginal. Three of the five monitored broad sectors reported reduced activity, namely Consumer Services, Finance & Insurance and Real Estate & Business Services.

However, the report found that despite lower output requirements, firms raised their payroll numbers for the ninth successive month during May. There were reports that firms raised their staffing levels in response to higher volumes of new business. However, job creation has eased to the weakest in 2018 so far and was modest. Jobs growth was evident across all broad five sectors, with the sharpest rise reported in information & communication.

On the price front, input cost inflation picked up from April’s recent low and was solid overall. That said, service providers were restricted in their ability to fully pass on higher cost burdens to clients. According to managers participating in the survey, higher volumes of unfinished business partly emanated from delayed client payments. Input prices rose during May, thereby, extending the current sequence of inflation to 21 months. Higher salaries, as well as prices for fuel and vegetables were reported to have increased in the latest survey period.

Even while there was a sharper rise in input prices, output charge inflation moderated to an 11-month low. This highlighted that firms were unable to fully pass on higher cost burdens to price-sensitive customers. Looking ahead, business confidence towards the 12-month outlook for output among service providers is the strongest since January 2015. Panellists reported that promotional activities and an improvement in demand conditions underpinned business confidence

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