Services sector activity hits 12-yr high in Feb on strong demand

India’s purchasing managers’ index (PMI) for the services sector touched a 12-year high of 59.4 in February owing to strong demand, ease in price pressures as well as job creation, according to the latest S&P Global India Services PMI Business Activity Index. In January, the services PMI stood at 57.2, whereas it was 58.5 in December. A reading above 50 indicates an overall increase in output compared to the previous month.

"The Indian service sector moved one step forward in February, with output expanding at the strongest rate in 12 years amid the joint-best improvement in new business intakes over the same period. Still, capacity pressures remained mild and jobs rose only marginally. Helped by a substantial moderation in cost pressures — input prices increased at the slowest pace in nearly two-and-a-half years — output charge inflation softened to a 12-month low," the rating agency says.

New orders placed with service providers rose further in February, with several firms suggesting that competitive pricing boosted sales. The latest upturn in sales was the nineteenth in consecutive months and the joint-strongest in 12 years. Consumer Services was the best-performing area in February, registering the fastest increases in new orders and business activity of the four monitored sub-sectors.

"The service sector more than regained the growth momentum lost in January, posting the sharpest expansion in output for 12 years as demand resilience and competitive pricing policies underpinned the joint-best upturn in sales over the same period. Services companies were often able to leave their average fees unchanged amid retreating cost pressures. The latest PMI results showed the slowest increases in input prices and selling charges in 29 and 12 months respectively, with rates of inflation below their long-run averages in both cases," says Pollyanna De Lima, economics associate director at S&P Global Market Intelligence.

Although Indian service providers signalled a further increase in their expenses midway through the final fiscal quarter, the rate of input price inflation moderated to a 29-month low. Companies commonly cited higher food, material, transportation, and wage costs. Only 4% of services companies transferred cost increases to their clients, while the vast majority opted to leave selling prices unchanged. Subsequently, the overall rate of charge inflation eased to a 12-month low. As per the rating agency, while consumer services topped the rankings for input costs, the sharpest rise in output charges was seen in transport, information, and communication.

In terms of employment generation, the services sector reported a marginal increase in job creation owing to no change in staff in most companies. since January. Meanwhile, though outstanding business continued to increase, the pace of accumulation softened from January and was only slight. Some companies linked higher backlogs to strong inflows of new business while others mentioned having sufficient staff to stay on top of workloads.

"Despite the strong upturn in new business intakes, service providers noted only mild pressure on their capacities and, as a result, a large proportion of firms left payroll numbers unchanged. It seems that hiring growth was also dampened by a lack of confidence in the business environment. The degree of optimism recorded in February was the lowest for seven months and below the historical trend as some companies doubted demand would remain this resilient. Others displayed concerns surrounding fierce competition for new work," Lima adds.

According to the rating agency, private sector output increased for the 19^th successive month in February to 59.0, highlighting a sharp and stronger rate of expansion. Growth was stronger in the services sector than in manufacturing. The country’s manufacturing PMI declined to a 4-month low at 55.3 in February owing to a rise in input costs.

Services firms also recorded a faster upturn in new business than their manufacturing counterparts. At the composite level, sales expanded at the joint-quickest rate in 11 years.