What PMI data for June show about services activity in India

The world at large may be fearing a 2008-style recession over the next few quarters but India’s services sector has been expanding at a feverish pace, or at least that is what the latest Purchasing Managers’ Index (PMI) data seems to suggest. 

The latest numbers show that India’s services sector expanded at the quickest pace in 11 years in June, amid improvements in demand conditions. 

Having said that, inflation remained a concern, as prices too rose at the steepest rate in nearly five years. 

So, what do the numbers actually say?

S&P Global India Services Purchasing Managers' Index, or PMI, rose to 59.2 in June from 58.9 in May, the highest since April 2011, beating expectations. 

But what were the expectations?

A Reuters poll had predicted a dip to 58.7. A reading of more than 50 separates growth from contraction.

So, why did the services sector grow at such a brisk pace?

Companies said the upturn stemmed from ongoing improvements in demand following the retreat of pandemic restrictions, capacity expansion and a favourable economic environment. Services firms noted a substantial upturn in new work intakes at the end of the first fiscal quarter, with the rate of increase improving to the best in over 11 years.

“Activity growth in India's service sector moved up a gear again in June, reaching its strongest in over 11 years and surpassing that seen in manufacturing for the third month running," said Pollyanna De Lima, Economics Associate Director at S&P Global Market Intelligence.

“Demand for services improved to the greatest extent since February 2011, supporting a robust economic expansion for the sector over the first quarter of fiscal year 2022/23 and setting the scene for another substantial upturn in output next month.”

But why should this uptick be such a surprise?

This uptick in the services industry numbers comes amid a slump in India’s manufacturing sector growth, which slid to a nine-month low in June as high inflation crimped demand for new orders and production, indicating that a full economic recovery would take longer than expected. The S&P Global India Manufacturing PMI declined to 53.9 points in June from 54.6 points in May.

What more did S&P have to say about the numbers?

De Lima said that “cost pressures in the service economy remained stubbornly high in June, despite easing to a three-month low. With companies retaining significant pricing power, owing to robust demand conditions, output charge inflation climbed to a near five-year peak.”

Unrelenting inflation somewhat concerned service providers, who were cautious in their forecasts. On average, business activity is expected to increase over the course of the coming 12 months, but the overall level of sentiment remained historically low.