Services Sector Expands, Business Optimism Touches 11-Month High: Report

Bolstered by improved domestic demand, the country's services sector expanded for the fourth consecutive month in January as business activities quickened and rising business optimism is set to sustain the growth momentum, a monthly survey said on Wednesday. The seasonally-adjusted India Services Business Activity Index rose from 52.3 in December to 52.8 in January, pointing to a quicker expansion in output. The index was above the critical 50 mark that separates growth from contraction for the fourth month in a row during January. Though the pace of growth accelerated from December, the headline figure remained below its long-run average of 53.3 and was consistent with a moderate pace of growth, the survey said.

According to panelists, marketing efforts, the reopening of some establishments and strengthening demand all supported the increase in sales. "The Indian service sector enjoyed good levels of activity in January, with new business volumes rising for the fourth successive month and growth rates for both measures picking up from December," said Pollyanna De Lima, Economics Associate Director at IHS Markit.

Further, the survey said the rise in new business was centred on the domestic market, as new export work decreased further as travel restrictions and the COVID-19 pandemic dampened international demand for services. On the inflation front, input costs increased for the seventh straight month at the start of 2021, with monitored companies reporting higher prices for fuel and a wide range of materials.

"The main area of concern is the extent to which costs are rising across the services economy, with the rate of inflation remaining above trend despite easing from December," Lima said. Lima also noted that "there are signs that higher costs are preventing firms from taking on additional staff, with the PMI (Purchasing Managers'' Index) survey showing a second successive fall in employment".

There were back-to-back declines in service sector employment. The pace of job shedding was, however, marginal as 97 per cent of survey members indicated no change in payroll numbers since the preceding survey period. Meanwhile, the launch of COVID-19 vaccine programme boosted optimism towards the 12-month outlook for output. The overall degree of optimism touched an 11-month high.
"... with business optimism rising to an 11-month high in light of the new COVID-19 immunisation programme, the service sector looks set to sustain growth and confidence towards hiring may improve as COVID-19 concerns diminish," Lima said.

Meanwhile, business activity across the private sector expanded at a marked and accelerated pace at the start of 2021, with growth picking up among manufacturers and service providers. The Composite PMI Output Index, which measures combined services and manufacturing output, edged up to 55.8 in January, from 54.9 in December. "When we combine the results for the service sector with those for manufacturing, the picture for the Indian economy looks brighter. Across the private sector, output and new orders rose markedly and at rates that surpassed their respective long-run averages," Lima noted.