Services sector activity slowed sharply in February on the back of slower growth in new business flows, according to HSBC’s Purchasing Manager’s Index (PMI), which fell to 54.2 from 57.5 in January. This is in line with the broader contraction seen in the services sector of the economy in third-quarter gross domestic product (GDP) data. The services segment saw a sharp contraction because of expenditure cuts by the government and an overall weakness in manufacturing that has percolated through to the services sector.
A slowdown in services generally comes with a lag. Services growth fell to an all-time low of 6.1% in the December quarter, the lowest in the 2004-05 GDP series as there was a broad-based contraction across all the segments—construction, trade and transport, financial and real estate, and community services.
Community and social services, a proxy for government spending, pulled back to 5.4% in the December quarter from average of 7% in the past year because of cuts in expenditure by the government to rein in the fiscal deficit. Slowing credit growth has weighed on financial and real estate services, which slowed to 7.9% in the third quarter from 9.4% in the previous quarter.
For the December quarter, services PMI averaged around 53.8 compared with 55 in the July-September quarter.
The services sector isn’t expected to rebound any time soon. Sonal Varma, an economist at Nomura Financial Advisory and Securities (India) Pvt Ltd, said the weakness in the services sector will persist over the next two quarters unless there is a turnaround in investment activity, which looks unlikely given the order pipeline, delays in approvals and the slide in project announcements.
Trade, hotels, transport and communication, where growth is the slowest since June quarter, 2009, to 5.1%, will remain subdued unless manufacturing activity rebounds, but again export demand is weak due to the uncertain global environment. Community, social and personal services will continue to languish, due to the squeeze in government expenditure, but it may rise ahead of elections next year.
The only silver lining is inflation. If inflation continues to ease and the Reserve Bank of India cuts interest rates, consumption demand will get a boost and lift overall manufacturing activity, which could lead to a rebound in services.