India's service sector expands at fastest pace in over 11 years

India's service sector activity in June was the strongest in over 11 years as demand for services improved, a monthly survey showed on Tuesday.

The seasonally adjusted S&P Global India Services PMI Business Activity Index rose to 59.2 in June from 58.9 in May, its highest mark since April 2011. A reading above 50 indicates an overall increase in output.

The upturn stemmed from ongoing improvements in demand following the retreat of pandemic restrictions, capacity expansion and a favourable economic environment.

"Activity growth in India's service sector moved up a gear again in June, reaching its strongest in over 11 years and surpassing that seen in manufacturing for the third month running," says Pollyanna De Lima, economics associate director at S&P Global Market Intelligence.

Demand for services improved to the greatest extent since February 2011, supporting a robust economic expansion for the sector over the first quarter of fiscal year 2022-23 and setting the scene for another substantial upturn in output next month, Lima adds. "Consumer Services posted the strongest increases in both output and new orders in June, but growth rates quickened across the board."

Although firms expect the recovery to be sustained over the coming 12 months, concerns surrounding price pressures restricted business confidence.

Cost pressures in the service economy remained stubbornly high in June, despite easing to a three-month low, the survey shows.

"With companies retaining significant pricing power, owing to robust demand conditions, output charge inflation climbed to a near five-year peak," says Lima.

Firms were able to secure new orders despite charging more for their services. June data showed the fastest rise in selling prices since July 2017 as several companies sought to transfer part of their additional cost burdens to clients. Stronger increases in charges were seen across the four broad areas of the service economy, with the sharpest upturn recorded in transport, information and communication.

Unrelenting inflation somewhat concerned service providers, who were cautious in their forecasts. The overall level of sentiment was well below its long-run average as only 9% of companies forecast output growth.

Some companies responded to capacity pressures by hiring additional staff in June, but the vast majority (94%) left payroll numbers unchanged. Overall, services employment rose marginally, following a decline in May.

Meanwhile, growth of Indian private sector output steadied in June, as a faster increase in services activity offset a slower rise in factory production. The S&P Global India Composite PMI Output Index was at 58.2, little-changed from 58.3 in May and indicative of a marked rate of expansion.