Solid demand lifts India services activity to 7 year high in January

India’s service sector started the year with output growth hitting a seven-year high on the basis of strong domestic demand, showed a private survey released on Wednesday.
According to the IHS Markit India Services PMI, the business activity index grew to 55.5 in January from 53.3 of the previous month. The upswing resulted from favourable market conditions and better underlying demand, survey participants said.

However, the growth in demand was accompanied by inflationary pressures on input costs, which reached a high last seen in February 2013. The steepest increase in this figure came from the consumer services sector.

The company’s Composite PMI Output Index, in which a score above 50 indicates growth, also showed an improvement from 53.7 in December to 56.3 in January. The seven-year high of private sector activity was largely due to broad-based acceleration in manufacturing and services, the survey said.

“With business revenues rising, service providers continued to increase capacity to meet further strong growth in sales. This is good news for jobseekers, particularly when we consider the results from the manufacturing industry which showed the steepest upturn in employment since August 2012,” said Pollyanna de Lima, Principal Economist at IHS Markit.

Most of the demand came from the domestic market with a fall in exports ending a ten-month expansion, mainly due to lower demand from China, Europe and US, survey panelists said.

The results are in line with government expectations of an uptick in the coming fiscal. Finance Minister Nirmala Sitharaman had announced the budget estimate of gross domestic product (GDP) growth at 6%-6.5% in FY21.

However, cost inflation continued to be a dampener amid reports of higher prices for beauty products, food, freight, fuel and maintenance, the survey said. Consequently, a number of services companies lifted their selling prices in January with the rate of charge inflation picked up to the fastest since February 2018.

“The service survey pointed to the sharpest increase in input prices in just under seven years, with companies mostly absorbing the added cost burdens themselves instead of fully passing these on to their customers. This may translate into quicker increases in selling prices in months to come, which may curb sales. Firms could also choose to restrict hiring in order to protect profit margins,” Lima said.