Service sector expands at fastest rate since August

New business received by Indian services companies increased for the seventeenth month in a row in December 2022.

The seasonally adjusted S&P Global India Services PMI Business Activity Index rose from 56.4 in November to 58.5 in December, highlighting the strongest rate of expansion since August. A reading above 50 indicates an overall increase in output.

December data highlighted an improvement in the health of the Indian service sector, with a quicker upturn in new business boosting output growth. More jobs were created and companies remained strongly upbeat towards the year-ahead outlook for business activity.

"December saw a welcome expansion in Indian services activity, underscoring the resilience of demand as 2022 came to an end. As we head into 2023, companies signalled strong optimism towards the outlook for output. Around 31% of panellists forecast growth, while only 2% anticipate a contraction," says Pollyanna De Lima, economics associate director at S&P Global Market Intelligence.

Positive sentiment and ongoing growth of new business continued to support job creation, but there were areas where capacities were reportedly adequate to cope with current requirements, Lima says.

There was a sharp rise in firms' expenses — amid greater energy, food, staff and transportation costs — which led to a further increase in prices charged for the provision of services.

"Inflation trends were mixed, as input prices rose at a faster pace and the upturn in charges moderated. On the expense front, services firms reported pressure from energy, food, staff and transportation costs. Although easing from November, the rate of output charge inflation remained elevated as several companies felt the need to transfer escalating costs through to clients," Lima adds.

The Finance and Insurance segment recorded the quickest increase in output, whereas Real Estate and Business Services propped the rankings, the report says. Finance & Insurance as the best performing sector with regards to sales, while Real Estate & Business Services saw the slowest expansion in new orders.

The overall rate of inflation quickened from November and was above its long-run average. By sector, input cost inflation was most acute in Consumer Services, it says.

"As a result of a further increase in business expenses, firms lifted their own selling prices at the end of the year. The rate of charge inflation eased from November, but remained solid and historically elevated," the report adds.

Indian service providers re-adjusted their capacities to accommodate for rising new business via further recruitment drives in December. The pace of job creation was above its long-run average, but eased to a five-month low.

Although capacities came under pressure from robust intakes of new work, December data pointed to only a mild increase in outstanding business.