India's purchasing managers’ index (PMI) for the services sector declined to 61.2 in May as against 62 in April, according to the latest S&P Global India Services PMI Business Activity Index. Despite falling from April level, the latest reading is still the second-strongest rate of growth in just under 13 years. Favourable demand conditions, new client wins and positive market dynamics supported output.

A reading above 50 indicates an overall increase in output. The output rose at the second-quickest pace since July 2010, supported by the sustained growth of new business in the face of positive demand trends. Additionally, monitored companies expanded their workforces to accommodate higher intakes of new work. However, the service economy also endured an intensification of inflationary pressures as evidenced by stronger increases in both input costs and output charges.

Demand strength underpinned another monthly increase in new business at service providers. The rate of expansion softened from April's near 13-year high but was among the strongest over this period. External demand for Indian services continued to improve in May, highlighted by a fourth successive rise in new export business. Moreover, the pace of expansion was solid and the quickest in the calendar year-to-date.

"The PMI data for May stand as a compelling testament to prevailing demand resilience, impressive output growth and job creation within India's dynamic service sector. However, inflationary pressures continued to pose a challenge for service providers, with panellists noting rising costs for food, inputs, labour and transportation. Faced with the delicate task of balancing these increases and maintaining affordable prices for consumers, firms opted to lift selling prices again in May. Worryingly, the survey showed the joint-fastest upturn in output charges for nearly six years," says Pollyanna De Lima, Economics Associate Director at S&P Global Market Intelligence.

To accommodate for sustained increases in new business, services companies sought to expand operating capacities by hiring extra workers. Employment rose at a slight rate that was nonetheless the fastest in 2023 so far. Despite the upturn in employment, and in line with robust improvements in new work, outstanding business rose further midway through the first fiscal quarter. That said, the rate of backlog accumulation was marginal and equal to April.

Indian service providers reported higher food, input, transportation and wage costs in May. Overall input prices rose at a marked rate that was the fastest since last December and above its long-run average.

Services companies maintained an upbeat view that business activity would increase over the coming 12 months. Advertising, demand strength and favourable market conditions were among the reasons cited for optimistic forecasts. The overall level of confidence fell slightly from April, however, amid some concerns about competitive pressures.

"While ongoing increases in output charges could erode purchasing power, affect the affordability of services and potentially dampen economic growth, companies could be seeking operational efficiencies and exploring alternative sourcing options to navigate through these challenges. With policymakers closely monitoring inflation developments, long-waited cuts to interest rates — which could aid business strategies, budgeting and investment plans — appear more distant," says De Lima.

Follow us on Facebook, X, YouTube, Instagram and WhatsApp to never miss an update from Fortune India. To buy a copy, visit Amazon.