India's Slowing Growth Momentum Will Struggle To Take-Off: PMI Survey

India's services sector activities picked up only marginally in February, suggesting Asia's third-largest economy, which lost momentum last quarter, might struggle to regain its stride, according to a private monthly survey.

The IHS Markit's Services Purchasing Managers' Index increased slightly to 51.8 in February, from a six-month low of 51.5 in January.

While the above 50-level indicates growth from contraction for the seventh month in a row, it reflects only a moderate expansion rate.

"Growth in the service sector failed to rebound as meaningfully as many would have hoped given that COVID-19 cases receded considerably from January's new wave and restrictions were lifted," noted Pollyanna De Lima, associate economics director at IHS Markit.

"Looking at the anecdotal evidence supplied by survey participants, inflationary pressures, input shortages and the local elections dampened growth."

That does not bode well for the Indian economy, as data showed growth slowed in the October-December quarter even before the Omicron variant of the coronavirus took hold.

Following the escalation of the pandemic and an associated slowdown in growth during January, the service sector moved up a gear in February as COVID-19 cases declined and restrictions were lifted, the survey released on Friday said.

"Despite one of the sharpest spike in infection numbers, India's third wave was much benign in terms of health impact, and hence, the impact on mobility was minimal. In fact, at the peak of the wave, the drop in mobility was quite small, and all through it remained above the pre-COVID levels," said Kunal Kundu, India economist at Societe Generale.
 
"It is not a surprise; therefore, that service activity remained quite robust, especially the contact intensive ones. Virtually two years of being stuck at home have resulted in so-called vengeance buying," he added.

While new business expanded at a slightly quicker pace in February, it remained tepid. Foreign demand marked two years in the contractionary territory and last month's rate of decline was the sharpest since September.

"New business and services activity expanded only modestly, and at the second-slowest rates since last July. Looking at the anecdotal evidence supplied by survey participants, inflationary pressures, input shortages, and the local elections dampened growth," IHS' Ms De Lima said.

Ms De Lima also noted that business optimism among services firms remained muted relative to its trend, despite improving from January, owing to pandemic-related uncertainty and inflationary pressures.

"Although easing from January's decade high, the rate of input cost inflation remained sharp in February. That said, fewer firms passed on additional cost burdens to clients amid subdued demand conditions. Output prices rose only slightly, and at the slowest pace in five months," she added.

The monthly survey on the country's manufacturing PMI, released on Wednesday, showed that manufacturing sector activities expanded in February as output and new orders grew at accelerated rates, supported by favourable demand conditions. 

"Even though new business and output rose at quicker rates, those were below their respective long-run averages. "There was also an uptick in business confidence, but firms continued to shed jobs. Meanwhile, input costs increased at a softer rate, as did output prices," said Ms De Lima.

Inflationary effects are likely to intensify as the survey was conducted before Russia invaded Ukraine, driving a surge in oil prices - India's most significant import.

Surging inflation on the one hand and rising uncertainties over the economic impact of the Russia-Ukraine crisis on the other might make it difficult for the Reserve Bank of India to decide on policy.

"Pricing pressure remained high and is expected to increase further, in sync with the rise in international commodity prices, a development that could also curb demand in the coming quarters," noted economists at Barclays.

"So far, high-frequency indicators continue to show signs of resilience – goods and services tax (GST) collections remain strong, trade volumes have held up, and mobility levels are improving. Still, the economic recovery remains weaker than expected," they added.