India’s service PMI declined to 2 years lowest level

The service sector, which account for India’s Gross Domestic Production (GDP), declined to its two year lowest level because of decline in new business orders and expectations weakened on the back of the sluggish global economic environment, a survey showed on October 5.

The HSBC India Composite Index, which include the manufacturing and service sectors, declined to 50.2 in September compare to 54.5 in August, which is lowest level of headline index since November 2008.  Meanwhile, the seasonally adjusted Service Sector Business Activity Index also declined to the below 50 mark, to 49.8 in September compare to 53.8 in August. The below 50 level of service sector activity indicate a broad stagnation in the sector’s activity.

 Commenting on the India’s Service PMI survey, Leif Eskesen, Chief Economist for India & ASEAN at HSBC said, “The slowdown in growth has continued to broaden with the service sector seeing a further slowdown in economic momentum, especially for financial intermediation. Business activity was broadly unchanged from the previous month and new business is growing at a slower pace. Backlogs of work are still rising, but less fast, and employment fell in response to the deceleration in new order growth as well as staff leaving because of unmet wage demands.”

The slowdown in global economy and increased cost of capital along with inflation have affected the pace of the new business orders in the manufacturing and service sectors, the composite rate of increase plunged to the slowest from April 2009.

As per the survey, the employment during the month of September declined in both the sectors, because of the weaker growth in the output and new business orders. Input prices also surged in month of September. However, the rate of cost inflation was slowest compare to August. But the overall output prices surged for the 28 successive months, while the rate of charge inflation slowed slightly, it was the second-strongest in over three years. The increase in service sector charges outpaced the rise in costs for the first time in the series history, survey showed.

The headline inflation measured by wholesale price index (WPI), has been hovering around the two digit mark, and for the month of August it surged to 9.78% compare to 9.22% in July. The current level of inflation is almost twice the comfort level of the Reserve Bank of India (RBI). To bring inflation back into its comfort zone, the RBI, have increased its key policy rates for 12 times since March 2010, as a result, the cost of capital have increased with is adversely affecting the pace of investment in economy.

However, inflation pressures remain firmly in place. While both input prices and prices charged grew at a slower pace, they stayed high by historical standards. We are getting close to the end of RBI's tightening cycle, but we are not quite there yet”, Leif Eskesen added.