Services sector facing inflation, PMI sheds a tad to reaches 60.3 in July

Like the manufacturing sector, services sector too facing inflationary pressure, a survey result known as Purchasing Managers’ Index (PMI) showed on Monday. Also, the index dropped a tad to 60.3 in July as against 60.5 of June.

Meanwhile, the good news is that on the one hand despite some reduction index still showing expansion for 36^th successive months while on the other hand, there was solid rise in jobs as business confidence strengthens.

The index is prepared on the basis of responses from purchasing managers of 400 companies. Index above 50 means expansion, while below 50 index refers to contraction

“Robust demand conditions, reflected by increased new orders from both domestic and international markets, led firms to increase hiring levels,” Pranjul Bhandari, Chief India Economist at HSBC, said.

• Also read: India’s manufacturing PMI hits 59.1 in March, highest since 2008

A report, based on survey responses, said that favourable economic conditions and optimistic expectations for output supported recruitment among services firms. The latest rise in employment levels was among the strongest in close to two years. Job creation was achieved via the hiring of full- and part-time staff, anecdotal evidence showed.

Services has a share of over 53 per cent in Gross Value Added (GVA). Overall growth of the economy needs good growth of services.

However, as on date this sector is facing inflationary impact, which could in turn impact the growth too. The PMI report mentioned that higher wage and material costs continued to push up business expenses, with the overall rate of inflation quickening from June.

Stronger cost pressures and positive demand trends contributed to the steepest rise in prices charged for the provision of services for seven years.

“On the price front, higher wages and material costs led to a further increase in input costs. Consequently, output prices rose at the fastest pace in over 11 years,” Bhandari said. Adding to this report said that a pick-up in cost pressures and stronger pipelines of new business encouraged panellists to hike their selling prices again in July.

When explaining cost increases, firms particularly mentioned labour and materials. The latter was in turn attributed to greater outlays on eggs, meat and vegetables. “The overall rate of cost inflation was solid and faster than that seen in June, but remained below its long-run average,” it said.

Talking about coming days, the report mentioned that looking ahead, services firms remained strongly optimistic about growth prospects.

“Around 30 per cent of the survey panel forecast greater output volumes in the next 12 months, while only 2 per cent expect a decline. The overall level of sentiment rose since June and was aligned with its long-run average. Anecdotal evidence suggested that confidence in the outlook for demand and sales, alongside improved customer engagement and new enquiries, boosted optimism, it said.

“Service sector activity rose at a slightly slower pace in July, with new business increasing further, primarily driven by domestic demand. Looking ahead, services firms remained optimistic about the outlook for year ahead,” Bhandari concluded.

• Also read: Services follow manufacturing; PMI rises to 60.5 in June