Markets
Will services pass resilience test?
Summary
Much of the improvement in July was driven by a pick-up in new orders. This was led by a surge in export orders from Bangladesh, Nepal, Sri Lanka, and the United Arab Emirates, said the PMI survey.India’s services sector momentum continues to gather pace. The latest Purchasing Managers’ Index (PMI) data reflects this. The seasonally adjusted S&P Global India Services PMI surged to a whopping 13-year high of 62.3 in July, defying market expectations of a marginal dip in the index. A reading above 50 denotes expansion in activity.
Much of the improvement in July was driven by a pick-up in new orders. This was led by a surge in export orders from Bangladesh, Nepal, Sri Lanka, and the United Arab Emirates, said the PMI survey. To be sure, this is the second fastest pace of increase in new export orders since publication of the series in 2014. Sharing the optimism on the services sector is the latest Reserve Bank of India’s (RBI) forward-looking quarterly services and infrastructure outlook survey (Q4FY23). The survey noted not just an improvement in the overall business situation in the services sector during Q4, but also highlighted that demand for services is likely to grow sequentially till Q3FY24.
Further, bank credit to the sector has stayed robust, clocking a massive 26.7% year on year growth in June. In fact, services sector credit growth has remained in double digits from April 2022.
Its notable that the services sector has been resilient in the backdrop of several headwinds including a slew of rate hikes by the RBI since April last year. In fact, the services PMI print has been above the critical 50-mark for two years now, pointing towards the sustained strength of the sector.
That said, it remains to be seen if the sector will be immune to the heightened global growth concerns going ahead, that have risen lately. Some dampeners are building up. For example, services trade, a strong pillar for India’s external sector and current account, has been facing headwinds in the recent past. RBI data shows that services exports growth has tapered to a low of 3.5% year-on-year in June. This compares with double-digit figures posted throughout FY23.
The slower growth in June has pushed the services surplus to a three-quarter low in Q1FY24, despite a sizeable moderation in services imports. With the possibility of a growth slowdown looming large this year in the developed economies of the US, Canada and euro area, India’s biggest services exports destinations, the resilience of the services sector will be put to test. Another headwind facing the sector is the persistent domestic inflation concerns. The RBI survey mentioned above highlighted that firms expect input cost pressures to persist in the near term. The July services PMI survey signalled a further rise in input costs facing Indian services providers. “Moreover, the rate of inflation quickened to a 13-month high. Monitored companies signalled greater food, labour, and transportation costs," said the survey. This, if persistent, may weigh on margins and can adversely impact output, particularly when firms have weak pricing power amid slowing demand.
Added to this, seasonal risks are emerging. “High frequency indicators for June and July did point to some likely slowing in momentum, particularly, heavy rainfall in northern and northwestern parts of the country in July that likely affected mobility and transport services," said a report by Barclays Emerging Markets Research.
In the past, services sector has successfully defied similar headwinds and evolved as a strong catalyst of economic growth. For now, repeating the feat would be crucial for sustaining the India growth story. On the other hand, failing this test could have far-reaching implications, given the humongous share and contribution of the services sector to gross domestic product, employment, income, and foreign exchange earnings.
