Services sector shrinks - PMI at 41.2, fastest drop in 11 months

The story: India’s services sector activities contracted in June '21 as the intensification of the Covid crisis and reintroduction of containment meas

 Services sector shrinks - PMI at 41.2, fastest drop in 11 months

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• The story: India’s services sector activities contracted in June '21 as the intensification of the Covid crisis and reintroduction of containment measures restricted demand. In parallel, the factory output data saw a sharp decline too. This was revealed in the seasonally adjusted "India Services Business Activity Index" — compiled by IHS Markit.
• Details: The index fell from 46.4 in May to 41.2 in June, as new work intake and output contracted at the fastest rate since July 2020, which prompted companies to reduce employment again. In the vocabulary of Purchasing Managers’ Index (PMI), the 50-point mark separates expansion from contraction. (less than 50 is contraction)
• First and second wave comparison: It was expected that due to the Covid situation in India, the services sector would take a hit. The PMI data for June '21 showed that the quicker declines in new business, output, and employment were sharp, but not as bad as in the first lockdown. Uncertainty about the future path of the pandemic restricted business confidence among services firms, and sentiment slipped to a 10-month low.

1. With India expanding its vaccine options and the government announcing ambitious plans to immunise the entire adult population by the end of the year, a sustainable economic recovery can begin.
2. Services have the maximum share in India’s gross domestic product (GDP), with over 57 per cent contribution.
3. Even the global demand for Indian services deteriorated in June, with new export orders falling for the 16th consecutive month. Meanwhile, the overall level of business sentiment was down for the third month in a row in June, reaching its lowest mark since last August '20.

• Overall business scenario: Private sector companies in India noted a second successive monthly decline in business activity during June, as market conditions remained challenging due to the escalation of the pandemic. The "Composite PMI Output Index", which measures the combined services and manufacturing output, fell from 48.1 in May to 43.1 in June, signalling the sharpest rate of reduction since July 2020.
• Prices: Rising prices of edible oils and protein-rich items pushed retail inflation to a six-month high of 6.3 per cent in May '21, breaching the comfort level of the Reserve Bank of India (RBI). However, the RBI has maintained an accommodative stance and is not likely to raise policy interest rates. But reduction in rates is also not possible in near term (due to rising inflation).
• On manufactuing: The agency had also said the second wave of pandemic, coupled with local lockdowns, pushed manufacturing activities in reverse gear as PMI for June '21 dipped to 48.1. Manufacturing has a share of 17 per cent share in India's GDP. The numbers of these two sectors are expected to affect GDP growth rate during the April-June quarter. 

 

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