Services sector growth improves in December

Services sector growth improves in December

Combined services, manufacturing PMI fastest since demonetisation.India´s economy has a reason to cheer in the New Year with its biggest sector —services —rebounding to growth in December from contraction in November, though the expansion is moderate, according to a widely tracked Nikkei Purchasing Managers´ Index (PMI).

With manufacturing sector posting five year high growth in December, the combined expansion in the two sectors was the fastest since October 2016, the month of demonetisation.Higher activities in services led to increased hiring by firms with jobs growth quickening to the fastest since September, the PMI survey of 400 private sector firms showed.

However, effects of the goods and services tax (GST) still persist, since a large chunk of the improvement in PMI account delayed payments from previous months, and cash shortage still not abated.PMI for services grew from 48.5 in November to 50.9 in December.

APMI above 50 represents expansion or growth, while that below 50 indicates contraction.A coimprovement in both the sectors bodes well for the Advance Estimate of gross domestic product in the current financial year (FY18), wherein the Narendra Modi government saw the lowest growth in its tenure at 5.7 per cent in July-September 2017 in its over three years of rule.

“Latest PMI data indicate better growth in the second half of FY18, when it is viewed along with improved exports and core sector growth in the month of November,” Dharmakirti Joshi, chief economist at CRISIL,a rating agency, told.Business Standard.December 2017 is the first time since demonetisation that manufacturing and services have shown a simultaneous expansion which was neither due to immediate recovery effect post demonetisation or the GST implementation.

Business activity in the services sector, which dealt with two major blows of contraction —one after demonetisation and other after GST implementation —had shown a dip in November 2017, too, (see chart), indicating a sustained impact on services post GST, especially in the information technology/ information techenabled services (IT/ITeS)domain.

The uptick in December PMI for services was held by information and communications, finance and insurance subsectors.But the GST still continues to “weigh on underlying sales volumes” resulting in decline in new contracts,areport by the IHS Markit,a compiler of PMI, said.

Aashna Dodhia, author of the December report and an economist at Markit, terms the December improvement as a marginal expansion.“India´s service economy remained onaweak growth trajectory amid reports that the GST was still hindering efforts to secure new clients,” she added.

While expansion in services was marginal, that in manufacturing was best in the past five years, indicating stronger demand from domestic and global market, says the report.But this five year peak comes with a caveat: Most of the robust improvement has been contributed by transactions that represent delayed payments from previous months.

The Business Standard, New Delhi, 5th January 2018