Marginal growth in India’s service sector in Feb; job losses continue

The service sector in India recorded marginal growth in February on the back of improved bookings and demand amid receding Covid-19 cases and restrictions, showed the monthly services PMI survey on Friday.

The seasonally adjusted IHS Markit India Services Business Activity Index rose to 51.8 for the month review from 51.5 in January, depicting moderate expansion. A reading above 50 indicates growth in health of the sector compared to the previous month.

“Growth in the service sector failed to rebound as meaningfully as many would have hoped given that Covid-19 cases receded considerably from January's new wave and restrictions were lifted,” commented Pollyanna De Lima, Economics Associate Director at IHS Markit.

While new business and output increased at a quicker pace in February, but remained below their respective long-run averages, the report showed. There was also an uptick in business confidence, but firms continued to shed jobs. Meanwhile, input costs, as well as output prices, increased at a softer rate.

“Rising from 51.5 in January to 51.8 in February, the seasonally adjusted India Services Business Activity Index pointed to a moderate rate of expansion that was marginally quicker than in January. The upturn was attributed by panellists to greater bookings, better demand conditions and the retreat of the pandemic,” the IHS Markit survey noted.

“That said, the latest increase was subdued by historical standards, with some companies indicating that growth was dampened by competitive pressures, Covid-19 and higher prices,” it further added.

Mirroring the rise in health of the sector, new business inflows to service providers registered a faster increase, but were weaker when compared to the average over the survey’s history. “Several firms suggested that marketing efforts, demand resilience and new client wins boosted sales. There were, however, signs that growth was hampered by input shortages, the pandemic and local elections,” the service sector survey mentioned.

Demand for Indian services from international sources remained subdued in February, as new business from abroad further declined during February. The rate of reduction in international demand to Indian service sector was the fastest since last September, the report stated.

Meanwhile, some business in the service sector continued to reduce headcounts during February in the face of relatively weak growth of new business and a lack of pressure on capacity. The decline in service jobs last month continued for the third month, and was the fastest since July 2021.

While operating expenses eased from the ten-year high seen in January, companies continued to report higher levels in February. The overall rate of increase was sharp, “with chemical, energy, food, fuel, labour, metal, plastic and retail costs reported as the key drivers of inflation”.

In February, service providers revised upwards the charges levied by them as companies continued to transfer additional cost burdens to clients. However, the rate of output price inflation softened to a five-month low and was below its long-run average.

Outstanding business volumes were broadly stable in February as 99% of IHS Markit survey respondents signalled unchanged backlogs from January's levels.

Business confidence in the Indian service sector strengthened in February, spurred by expectations that the pandemic-borne difficulties will continue to retreat and increased focus on customer engagement will deliver results. In the long-run though, the overall degree of optimism was historically muted amid lingering concerns over inflationary pressures due to various factors and Covid-19.