India’s Services Growth Expands At Fastest Pace In Nearly Two Years In July

Customers browse items at a wholesale store selling sunglasses near Mangaldas Market in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Activity in India's services sector, which contributes nearly 60 percent to the GDP, improved at its fastest pace in nearly two years in July on better demand and new business orders.

The Nikkei India Services Business Activity Index rose to 54.2 last month from 52.6 in June, according to a statement by research firm IHS Markit, which compiles the index. A reading below 50 indicates contraction in activity, while a number above it signals expansion. The July reading is the highest since October 2016, when it stood at 54.5.

Companies hired at their fastest pace since April as demand improved. Business confidence towards the 12-month outlook also picked up from the June low.

Activity in the manufacturing segment, too, had improved with the Nikkei India Purchasing Managers Index touching 52.3 in July. The Nikkei India Composite PMI Output Index rose to 54.1 last month from 53.3 in June.

“Marked expansions in both the sectors, with stronger growth in the latter, powered the fastest improvement in overall operating conditions in the economy since October 2016,” Aashna Dodhia, economist at the research firm, said.

But the economist also highlighted a few warning signs reflected by PMI price data. Services companies faced the fastest rise in input costs since March, Dodhia said. “Higher food and fuel prices contributed to the upward cost pressures.”

An uncertain global climate, currency weakness and a strong inflation may continue to put pressure on the central bank to hike interest rates over the coming months, Dodhia said.

Earlier this week, the Monetary Policy Committee hiked the benchmark interest rates for the second straight time by 25 basis points against the backdrop of rising inflation. Core inflation had inched up to 6.3 percent in May, while the headline inflation had risen to 5 percent.

Yet, despite a marked rise in cost burdens, service providers raised their output charges at the slowest pace since March 2017, according to the PMI survey. “Underlying data highlighted that firms were unable to fully pass on greater cost burdens to price-sensitive clients.”