The services sector logged its fastest pace of growth in six months in January, driven by improvement in domestic demand and new businesses.
According to HSBC’s India purchasing managers’ index (PMI), service sector activity accelerated to 58.0 for the month, led by ‘hotels & restaurants’ and ‘financial intermediation’. The sector had weighed in at 54.2 on the index in December.
This, incidentally, is the fastest pace of growth since July, when the sector had logged 58.2.
Strengthening market conditions also led to a pickup in new business (58.2 vs 55.7 in December) and boosted businesses sentiment (71.2 vs 64.4 in December).
Earlier this month, the manufacturing PMI had also come in sharply higher for January at 57.5 compared with 54.2 in December, its strongest showing since May 2011.
Given the rebound in both manufacturing and services, the composite index covering the two sectors improved further to 59.6 from 54.7 in the previous month.
Leif Lybecker Eskesen, chief economist for India & Asean, and Prithviraj Srinivas, economics associate of HSBC, said in their note that despite the pickup in output and orders, backlogs of work eased slightly (49.5 compared with 50.4 in December) as most businesses were able to cope with the new business. Moreover, employment rose slightly (50.4 vs 50.6 in December).
Strong demand has allowed firms to further raise the prices charged for their services (57.7 vs 57.3 in December).
Hearteningly, input costs rose less quickly in January (56.9 vs 59.1 in December).
However, the cost pressures are still above the historical average, said Eskesen and Srinivas in their note.
Indraneel Pan, chief economist, Kotak Mahindra Bank agreed that the price charged for services will go up further and that the cost pressure on the downside may not be significant.
In terms of the wholesale price index, the cost pressure is mostly on manufacturing, while the services sector cost pressure shows up in the consumer price index, said Pan.
“The upturn (in manufacturing and services PMIs) reflects an improvement in domestic demand as sentiment has recovered since end-2011 when global wobbles and domestic policy paralysis held back demand,” noted Eskesen and Srinivas.
But economists are of the view that the upturn may not be enough to boost the index of industrial production, or IIP.
“If you look at the correlation, it is pretty weak. This is because just as an index number, you have problems with the base. Due to this, data reliability is on the lower side. Also, IIP comes with a lag and the PMI data is a forward expectation,” said Sachidanand Shukla, senior vice-president and economist at Enam Securities.
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