What latest services sector output data shows about demand and inflation in India

resr 5paisa Research Team

Last Updated: 14th December 2022 - 11:00 pm

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In what spells some good news for the Indian economy, the country’s services sector output growth rose to a three-month high in November as new business inflows rose markedly, lifting optimism to its highest level in eight years, even as there was a substantial increase in input inflation, according to a monthly survey.

The seasonally adjusted S&P Global India Services PMI rose from 55.1 in October to 56.4 in November. Survey participants linked the latest expansion to demand strength, successful marketing and a sustained upturn in sales.

What do these results indicate?

The survey results indicate that services — especially contact-intensive ones – which were the main driver of GDP growth in Q2FY23 continues to be the strong segment of the economy. In Q2, the services category trade, hotels, transport, communications etc grew 14.7% on year; financial, real estate and professional services at 7.2%; and public administration, defence etc at 6.5%.  

What has S&P actually said about the numbers?

“Indian service providers continued to reap the benefits of strong domestic demand, with PMI data for the penultimate month of 2022 showing faster increases in new business and output. Moreover, expectations of demand buoyancy in the medium-term promoted further job creation,” said Pollyanna De Lima, economics associate director at S&P Global Market Intelligence.

“Whilst on the whole the latest results are encouraging, the trend for inflation is somewhat concerning. Strong demand for services again boosted firms’ pricing power, with more companies transferring cost increases to their customers. The overall upturn in input costs was sharp and little-changed from October, while output charges rose at the quickest rate in over five years. 

“Evidence of stubborn inflation may prompt further hikes to the policy rate at a time when global economic challenges could negatively impact on India’s growth.”

But what about operating expenses?

Services companies across India again reported higher operating expenses midway through the third quarter of the current fiscal. In addition to greater transportation costs, firms mentioned higher prices for energy, food, packaging, paper, plastic and electrical products. Little changed from October, the overall rate of inflation was marked and above its long-run average, the survey noted.

And what about the order books of these services companies?

New orders placed with service providers in India rose for the 16th consecutive month in November. The rate of expansion was the fastest since August. According to panellists, sales were boosted by favourable underlying demand and fruitful advertising. The rise in total new orders was supported by a renewed increase in international sales. November data showed the first upturn in new business from abroad since the onset of Covid-19 in early-2020. That said, the overall rate of expansion was mild, the report said.

How is the S&P report compiled?

The S&P Global India Services PMI is compiled by S&P Global from responses to questionnaires sent to a panel of around 400 service sector companies. The sectors covered include consumer (excluding retail), transport, information, communication, finance, insurance, real estate and business services.

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