Service sector growth cools in May

India's May services output expanded at its slowest pace in five months amid price pressures and a severe heatwave.

The HSBC India Services Business Activity Index fell from 60.8 in April to 60.2 in May, its lowest mark since last December. It, however, remained comfortably above the neutral mark of 50 in May. A reading above 50 indicates an overall increase in output.

Growth was supported by rising sales, productivity gains and demand strength, it says.

May data showed that robust increases in new business intakes continued to underpin output growth across India's service economy, according to the HSBC

Both input costs and output charges rose to greater extents.

“On the price front, cost pressures ticked up in May led by higher raw material and labour costs. Firms were only able to transfer a part of the price rise to customers,” says Maitreyi Das, global economist at HSBC.

“India’s service activity rose at a slightly softer pace in May, with domestic new orders easing slightly, but remaining robust, implying strong demand conditions and successful advertising,” Das says.

Like for output, new orders rose at a substantial pace that was nonetheless the slowest in the calendar year-to-date, the PMI release says. Fierce competition and extreme heat across the country dampened growth, it adds.

One area that improved substantially in May was new export orders, with growth climbing to the fastest seen since the inception of the series in September 2014, according to HSBC. Survey participants noted strong growth of demand from Asia, Africa, Europe, the Middle East and the US.

“New export orders surged at a record pace, with broad-based demand from across the globe. On the price front, cost pressures ticked up in May led by higher raw material and labour costs. Firms were only able to transfer a part of the price rise to customers,” says Das.

Good news is the level of optimism about the year-ahead outlook rose at the fastest pace in eight months, leading service firms to increase their staffing levels, Das adds.

While some companies suggested that additional labour costs stemmed from overtime payments and upward salary revisions due to demand strength and productivity gains, several firms indicated having taken on extra staff. Not only did employment rise markedly, but also to the greatest extent since August 2022. Companies reported having hired junior and mid-level workers in May.

Indian private sector output rose sharply halfway through the first quarter, despite another loss of growth momentum. The HSBC India Composite Output Index slipped from 61.5 in April to 60.5 in May, highlighting the slowest rate of expansion since last December. There were softer increases in both factory production and services activity.