Services rebound after four months, PMI rises to 50.3 in February

NEW DELHI: India’s services activity bounced back into expansion mode for the first time in four months in February, a private business survey showed on Friday, providing further evidence that the effects of demonetisation may be fading.

The Nikkei/IHS Markit Services Purchasing Managers’ Index rose to 50.3 in February from 48.7 in January, marginally above the 50-mark that separates growth from contraction. The PMI manufacturing survey released on Wednesday had showed a similar recovery.

“Having contracted for three months in a row, incoming new business also picked up in February. However, as was the case for output, the pace of growth in new work was marginal overall,” the survey report said.

Government data released earlier this week showed the economy grew 7% in the demonetisation-hit October-December quarter, much higher than expectations, and is on course to clock 7.1% growth in FY17.

The turnaround in services activity and inflows of new work came from the financial intermediation and ‘other services’ categories, the sectors most impacted by demonetisation, which was announced on November 8.

Services PMI had declined to a near-three-year low in November in the aftermath of the cash swap that invalidated 86% of the currency in one stroke.

The seasonally adjusted Nikkei India Composite PMI Output Index, which combines both services and manufacturing, rose from 49.4 in January to 50.7, pointing to the first increase in private sector activity across the economy.

However, Pollyanna De Lima, economist at IHS Markit and the author of the report, said it is still too early to state that expansion rates will climb to their trend levels in the near term. On the employment front, the survey showed that services companies continued to reduce payroll numbers though the rate of job losses in February was only fractional.

“Companies remain reluctant to take on additional staff and confidence towards the 12-month outlook for output dipped to its secondlowest mark in over one year. These factors indicate that, so far, firms are doubtful about the sustainability of the economic recovery,” De Lima said.

INFLATION WOES
On the prices front, input cost inflation accelerated and service providers also raised their charges, so much so that “the increase in output charges was the first in five months and the most pronounced since mid-2016”, the survey said. Freight and raw material costs increased in the month. Higher cost burdens were also recorded in the manufacturing industry, where the rate of inflation climbed to a two-and-a-half year peak.

The increase in prices may weaken the case for an immediate interest rate cut by the Reserve Bank of India. The next meeting of the Monetary Policy Committee is scheduled for April 5-6. RBI kept lending rates unchanged at the last review in February, citing risks to inflation.