India's Services Sector Expands Faster in February Amid Rising Demand

The growth of India's dominant services sector accelerated in February, fueled by rising domestic and international demand, as new orders increased at a faster rate, according to a private business survey released on Wednesday.

The HSBC final India Services Purchasing Managers' Index (PMI), compiled by S&P Global, climbed to 59 in February from January’s 26-month low of 56.5.

The index has now remained above the neutral 50 threshold—signifying expansion rather than contraction—for 43 consecutive months.

"Supported by stronger domestic and international demand, Indian service providers witnessed a quicker rise in new orders during February. This boost in demand contributed to faster output expansion and a notable increase in employment," the survey stated.

Although firms faced rising cost pressures in February, the survey noted that inflation slowed to a four-month low. Meanwhile, the increase in output prices remained largely consistent with January's level and continued to exceed the long-term average.

The survey also indicated that "productivity improvements, robust demand, and higher business inflows were the main drivers of output growth, according to anecdotal evidence."

International demand played a key role in this growth, with service providers reporting increased business from clients across Africa, Asia, Europe, the Americas, and the Middle East. Overall, external sales grew at their fastest rate in six months.

"To meet the growing demand and ease capacity constraints, Indian service firms maintained strong recruitment efforts," the survey noted.

Employment saw a sharp rise, registering one of the highest growth rates since data collection began in December 2005. Panellists reported hiring both full-time and part-time employees.

Pranjul Bhandari, chief India economist at HSBC, emphasized that global demand—expanding at its fastest rate in six months—was a significant factor in driving growth in India’s services sector.

"At the same time, job creation and charge inflation remained robust in February. Looking ahead, while business sentiment remains generally positive, it slightly declined last month, reaching its lowest level since August 2024," she added.

Key Drivers of Growth

Several factors contributed to the services sector's strong performance. The rise in domestic demand was driven by increased consumer spending, favorable economic conditions, and growing business confidence. Additionally, government initiatives aimed at boosting infrastructure, digitalization, and financial services further supported expansion in key service industries.

Export-oriented service sectors, such as IT, consulting, and financial services, benefitted from global economic stability and rising outsourcing demand. The survey indicated that businesses providing software, customer support, and professional services saw heightened interest from international clients.

The financial services sector, including banking and insurance, also played a critical role in boosting the PMI. Increased consumer borrowing, digital banking adoption, and steady capital market performance contributed to the sector’s growth.

Challenges and Future Outlook

Despite the positive momentum, businesses faced certain challenges, including rising input costs, regulatory uncertainties, and global economic fluctuations. However, the survey highlighted that firms remained optimistic about future growth prospects, with many planning to expand operations and invest in new technologies.

Economists believe that if inflation remains controlled and demand continues to rise, India’s services sector could maintain its strong performance in the coming months. The Reserve Bank of India’s monetary policy decisions and external factors, such as geopolitical stability and global trade dynamics, will also play a crucial role in shaping the sector's trajectory.

Overall, the survey reaffirmed the resilience of India’s services industry, with strong fundamentals supporting continued expansion.