India’s services sector shrank faster in December compared to the previous month, raising worries about an early revival in the economy battling to claw out of a decade low slowdown, the results of a latest monthly survey showed.
The HSBC Services Purchasing Managers’ Index (PMI), compiled by Markit, fell to 46.7 in December from 47.2 in November, indicating faltering business conditions.
PMI is a metric to measure economic activity, comparing output to sales. A reading below 50 indicates contraction in factory output.
But there is a silver lining. Companies reported the strongest hiring activity since July, after four months of a near-stagnant labour market.
“The service sector continues to face headwinds, with weakening new business dragging down activity,” said Leif Eskesen, chief economist for India.
However Eskesen also noted that inflation pressures were easing, and optimism about the new year was rising.
A recovery in the services sector, which accounts for nearly two-thirds of India’s national income, is vital to turn around the economy, which grew at 5% in 2012-13: the lowest since 2002-03.
Broadly, the latest HSBC Markit data mirrors what official data has been showing.
India’s average services sector GDP grew 5.6% during July-September 2013, the lowest in more than 10 years.
The construction sector’s average growth in the past 10 quarters plunged to 4.7%, while trade, hotels, transport and communication sectors grew at a muted 6.2% in the past two-and-a-half years.
A sharp cut back in government spending was visible in the second quarter of 2013-14, as government consumption contracted by 1.1%.
“As slowing GDP growth is having an adverse impact on tax revenues and a weak rupee is raising the subsidy burden, a 10% cut in non-plan expenditure has been announced. As a result, growth in community, social and personal services almost halved to 4.2%in the second quarter, dragging down growth in overall services to less than 6%, the lowest in more than a decade,” credit rating and research firm Crisil noted in a report.
The HSBC Markit survey indicated that the upcoming national elections had also contributed to the service sector’s deceleration.
This is the longest period of continuous reduction in the services sector since the global financial crisis of 2008-09.
“This reflects continuing weakness, particularly with new orders and pricing power remains relatively weak adding to disinflationary trends,” Saugata Bhattacharya, chief economist, Axis Bank told HT.
The toxic mix of high inflation, low investments and widening deficit could not have come at a worse time for the government with national elections about four months away.