Services Sector Slows Down for Second Consecutive Month in August

India’s services sector slowed down for a second consecutive month in August as the pace of expansion comes down from a record high level seen in June, as reflected in the HSBC Services Purchasing Managers’ Index (PMI) based on a survey of 400 firms. However, even the current reading on the PMI is very robust and consistent with a fast expanding economy.

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The headline seasonally adjusted HSBC Business Activity Index stood at 59.3 in August, falling slightly from 61.7 in July. This was the second successive decrease in the headline figure, even though it continued to signal a very sharp pace of expansion in the country’s service sector.

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Earlier the manufacturing data too had shown some slowdown in expansion in August, although the absolute figure there too remained strong. Overall, the HSBC India Composite Output Index for the month of August stood at 60.3, down from 61.9 in July. However, the latest reading continues to remain consistent with a very rapid pace of growth in the overall economy.

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Looking at the sub-indices, the index of incoming new business received by the service sector firms increased markedly during the month, boosted by the ongoing improvement in global economic conditions as well as strong domestic demand. The survey also revealed that the latest growth was faster than that posted in July. All the six sectors monitored under the survey indicated that new business had risen during the month.

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Further, despite the sharp rise in output recorded during the month, backlogs of work with the service sector companies continued to rise in August. It clearly indicates increasing capacity pressures being faced by the economy. A similar finding was also revealed by the manufacturing PMI, thus indicating that overall economy was under capacity pressures and growth could slow down until the pace of investment picks up.

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In a related inference, the August data signalled a marked increase in input costs faced by Indian service companies. This is an expected development when capacities come under pressure. The latest rise in input prices was driven by higher purchasing costs and wage inflation. The survey indicated that while the rise in costs in August was marginally lower than the previous month, it was nonetheless strong in the context of the historical data.

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Overall, the services sector as well composite business activity seems to be doing pretty well for now. The recent slowdown reflects that capacities are getting filled and therefore pressures on cost side are building up. Commenting on the India Services PMI survey, Frederic Neumann, Co-Head of Asian Economics Research at HSBC said, “Service sector activity, which in India accounts for the bulk of economic output, slowed a little last month. But, monetary officials can hardly afford to relax their guard. Growth remains strong, and there are few signs that input and output price pressures are letting up meaningfully. Both employment generation and outstanding business remain consistent with a robust, ongoing expansion.”

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