Services still in slow zone, PMI at 49.2 in October

Services activities continue to decline for the second successive month as Purchasing Managers' Index (PMI) records 49.2 in October.

This is slightly better than the 48.7 in September , but still there is contraction. PMI is prepared on the basis of response from 400 managers working with different types of services company. The index is prepared by IHS Markit. Index above 50 shows expansion while below 50 means contraction. October showed the first back-to-back contraction since the second quarter of fiscal year 2017/18.

According to Pollyanna de Lima, Principal Economist at IHS Markit, it's somewhat worrying to see the Indian service sector stuck in contraction, as

firms react to muted demand by lowering business activity. Perhaps even more concerning was the downward revision to future expectations, given the possible

detrimental impact of subdued business confidence on investment and jobs. The latter already displayed its joint-weakest expansion in over two years.

In attempts to boost sales, service providers absorbed most of the rise in their cost burdens, lifting their fees only slightly despite intensified cost pressures.

Still, this wasn't sufficient to generate new work and we might see selling prices being discounted in the coming months as competitive pressures build up.

"Some areas of the service economy performed better than others. While growth was sustained in Transport & Storage, Information & Communication

and Consumer Services, softer rates of expansion were evident in all three cases. At the same time, solid declines in output and new work were recorded at Finance & Insurance and Real Estate & Business Services companies," she said.

The report accompanying the index noted that new business stabilised, following contraction in September, while job creation moderated. At the same time, concerns that challenging economic conditions will linger dragged business confidence to its lowest level in close to three years. There were mixed trends for prices. Cost inflation climbed to a one-year high, but charges increased at a softer pace as weak demand limited pricing power. Though there was contraction, still index rising from 48.7 in September, the headline figure was indicative of a marginal and slower rate of reduction.

Anecdotal evidence highlighted subdued demand conditions, competitive pressures and a fragile economic situation.

Total sales were broadly unchanged in October, after contracting in September for the first time in over a year-and-a-half. Companies that secured new work mentioned successful marketing efforts and new client wins, while those that noted lower sales commented on fierce competition for new business. October data indicated that demand weakness was centred on the domestic market, with exporters posting an increase in international sales. That said, the upturn in external demand was modest and the slowest in four months.

Service sector employment increased for the twenty-sixth month in a row, albeit at the joint-slowest pace over this period. While a few firms took on extra staff, this was curbed by job. New work stabilises, following reduction in September.

Business activity declines for second month running, however the degree of optimism observed in October was among the weakest seen in the near 14-year survey history. A number of panelists were concerned about the possibility that challenging economic conditions will persist.

Meanwhile, pending client payments caused a renewed increase in outstanding business held by service providers. The rise in backlogs was marginal, but contrasted with depletion in September. Amid reports of higher freight, fuel, material, vegetable and staff costs, input price inflation accelerated to a one-year high in October.

Services has maximum share i.e. 57 per cent  in Gross Domestic Products (GDP). Any decline in services activities will have impact on overall growth rate of GDP.