Business activity in India’s services sector continued to be marred by the coronavirus pandemic and reimposition of restrictions across states. Latest data from research firm IHS Markit showed that India’s services Purchasing Managers’ Index (PMI) fell to 41.2 in June 2021 from 46.4 in May. A reading above 50 indicates expansion and below that threshold points to contraction. According to the survey report, the latest reading pointed to the fastest rate of reduction since July 2020.
Business activity and new orders decreased in four of five broad areas of the service economy, with the fastest rates of contraction registered in consumer services. Transport and storage was the only segment to post growth, said the report. Further international demand for Indian services deteriorated further in June, with new export orders falling for the sixteenth consecutive month. The pace of contraction remained sharp, despite easing from May.
These factors weighed on the confidence of Indian service providers with the overall level of business sentiment down for the third month in a row in June, reaching its lowest mark since last August.
However, some economists are of the view that going ahead, these readings should improve indicating a recovery. “The decline jars sharply with the mobility indicators, which bottomed out in mid-May and have risen persistently thanks to the withdrawal of the second wave and the relaxation of local lockdowns, uneven though that may have been,” said Freya Beamish, chief Asia economist at Pantheon Macroeconomics Ltd.
It should be noted that the Nomura India Business Resumption Index picked up for a fifth consecutive week to 86.7 for the week ended 27 June from 80.7 the previous week and is now only 13.3 percentage points below pre-pandemic levels.
Beamish added that the dip in activity this time around was minor when compared with what was observed during the national lockdown last year, and the PMI should soon rebound, catching up with the mobility figures.
Sharing a similar view, Darren Aw, Asia economist at Capital Economics Ltd said, “Looking ahead, we expect the recovery to get back on track over the coming months as the second virus wave continues to subside and states scale back containment measures. We remain comfortable with our forecasts for GDP to contract by a seasonally adjusted 5% quarter-on-quarter in Q2, a much smaller drop than the 25% quarter-on-quarter collapse in Q2 2020.” Services sector contributes around 55% to India’s GDP growth, so a recovery in the services sector bodes well for India’s overall economic growth.
However, Aw cautioned that a rapid reopening will increase the threat of renewed outbreaks especially since vaccination coverage in India is still very low. “If that materialises, the services sector would once again be the most vulnerable,” he said.
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