Service sector grows at slowest rate in 4 months in July

India's services sector activity in July recorded the slowest rate of growth in four months as weaker sales growth and inflationary pressures restricted the latest upturn in business activity.

The seasonally adjusted S&P Global India Services PMI Business Activity Index fell to 55.5 in July from 59.2 in June — the highest figure in over 11 years. A reading above 50 indicates an overall increase in output.

The recovery in the Indian service sector lost momentum during July as demand was somewhat curtailed by competitive pressures, elevated inflation and unfavourable weather, says Pollyanna De Lima, economics associate director at S&P Global Market Intelligence. "Both output and sales increased at the weakest rates for four months."

However, business activity continued to rise strongly, with a similarly robust uplift in new business as the offering of new services and marketing efforts bore fruit, says Lima.

Companies that signalled higher business activity mentioned ongoing improvements in sales, the offering of new services and workers taking on overtime, the survey says, adding that the rise was curbed by price pressures and US dollar strength.

Data showed that the domestic market remained the key source of sales growth as international demand for Indian services worsened further. The latest drop in new international business was marked, but the weakest in six months.

Services companies reported a further increase in their average expenses during July, with food, fuel, materials, staff, retail and transportation cited as the key sources of inflationary pressures. Input costs rose sharply, though at the slowest pace in five months.

Ongoing cost increases led companies to lift their own selling prices in July. Despite the rate of inflation softening from June's near five-year peak, the latest rise was solid and the seventeenth in successive months.

July data showed a negligible increase in service sector employment across India. The rate of job creation was fractional and broadly similar to June. The vast majority of firms left payroll numbers unchanged amid a lack of need to raise workforces.

Business sentiment in the service economy was subdued in July. Only 5% of companies forecast output growth in the year ahead, which they hope would follow from a pick-up in demand and marketing efforts. The vast majority of firms (94%) predict no change in business activity from present levels.

"In line with concerns that economic growth has weakened as we enter the second fiscal quarter, service providers signalled subdued confidence towards the medium-term business outlook," says Lima.

Private sector growth softens too

PMI data for July pointed to a sharp, albeit softer, expansion in private sector activity across India. The S&P Global India Composite PMI Output Index fell from 58.2 in June to 56.6, highlighting the slowest increase since March. Manufacturing led the upturn with the quickest rise in production since last November, while growth of services activity eased to the weakest in four months.