Key indicator PMI his four-year low; experts say one should draw hasty conclusion and wait for this month's figure to get a clearer picture
Disruption in business activities and a possible adverse impact of rate hike on demand in the first month of implementation of the new indirect tax – goods and services tax (GST) – could have dragged down the Nikkei India Services Purchasing Managers' Index (PMI) to 45.9 from the eight-month high of 53.1 in June, said experts.
On Thursday, the service PMI number showed output in the services sector contracted in the first month of GST's launch just like the manufacturing PMI, which fell to 47.9 last month from 50.9 in June.
A reading above 50 indicates expansion while a number below 50 depicts contraction in business activity.
D K Srivastava, chief policy advisor, EY India, said "uncertainties" related to GST and "continued" overall lack of demand in the system could have led to the slump in service PMI last month.
"Overall, there is a hike in the service tax rate (from pre-GST rate of 15% to 18% under GST). So, that (rate increase) plus all these difficulties associated with the implementation of GST (could have pushed up the service PMI). I see a hike in service rate under GST as an important reason because compared 2-3 years back, when it was 12%, it is now, on an average 18%. That's a very steep hike," he said.
The EY economist, however, felt the contraction in service PMI was temporary and business activity in the sector will revive in a quarter or so; "I presume, this would be temporary. Demand (for services) would revive and the general economy would revive as people see growth. Uncertainties over the implementation of GST should get sorted out over the next quarter but we will have to wait for an overall revival of demand to see a recovery of service PMI. It will take at least two quarters for that".
Ranen Banerjee, partner, PwC India, said the Nikkei's service output number in July could be an "aberration" due to disruptions caused by the implementation of GST and that one should not jump to a conclusion based on that data.
According to him, due to complexities or lack of clarity on issues related to the new unified indirect tax, there could have been large scale postponement of invoicing and this may have caused the service PMI to slump last month.
"Like in the case of goods, in services also there have been issues. In the export component of services, lots of companies were unable to do invoicing because of non-clarity over Letter of Undertaking (LoU) (that is issued by states). The other aspect is there could have been some impact of the (hike in) tax rate itself. Though, it is not very clear," said Banerjee.
He said people should not draw a hasty conclusion from the steep drop in the service output figure in the previous month and should wait for the current month's number to get a true picture.
"We should not be too alarmed by this month's numbers, even in the case of goods. We should be alarmed if next month's number also show contraction. We need to see the next month's data because this month's number has a lot of abnormalities and aberrations. We will be able to take a more informed view base on next month's data," he said.
Banerjee, however, affirmed consumer prices for services could have gone up and would have impacted discretionary spending.
"Wherever there is discretionary spending that would be have been impacted the most," he said.
Pollyanna De Lima, principal economist at IHS Markit and author of the report, saw the huge drop in services and manufacturing output numbers as a "double-whammy of disappointing news" after a "pick-up in growth momentum" in June.
"PMI data for July highlight a reversal in fortunes across India, with the economy going into reverse mode after seeing a pick-up in growth momentum during June. The downturn in services follows similar weakness in manufacturing, to make a double-whammy of disappointing news at the start of the second quarter of the 2017-2018 financial year," she said in her report.
...& ANALYSIS
- GST was cited by cos for contraction in work orders
- Manufacturing PMI fell to 47.9 last month
- Uncertainties and lack of demand led to the slump, say experts
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According to him, due to complexities or lack of clarity on issues related to the new unified indirect tax, there could have been large scale postponement of invoicing and this may have caused the service PMI to slump last month.
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