Services sector growth falls to 3-month low in June on high inflation

Growth of India’s services sector, which accounts for around 60% of the country’s GDP, declined to three-months low in June as inflationary pressure intensified in both input costs and output charges, even though demand remained strong.

Purchasing Managers’ Index (PMI) for services fell to 58.5 in June from 61.2 in the previous month. The index had hit a 13-year high of 62 in April.

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Output growth remained sharp, despite softening to a three-month low, while confidence towards growth prospects strengthened.

On the price front, there were mixed trends. Input costs rose at a slower rate that was broadly aligned with its long-run average, but charge inflation quickened to a near six-year high.

"The latest PMI results for output charges coupled with upside risks to food prices suggest that interest rates are highly unlikely to be reduced as 2023 progresses,” said Pollyanna De Lima, economics associate director at S&P Global Market Intelligence.

June data showed a notable increase in prices charged for the provision of services in India. The rate of inflation was marked and the strongest seen in just under six years.

The pass-through of greater input and staff costs to clients was the primary factor highlighted by firms for the latest upturn in charges, S&P Global noted in the report.

One-in-ten firms noted higher operating expenses, citing greater food, construction material and wage costs.

"The headline print has declined now for two consecutive months, though absolute levels are still elevated and indicate continued strong expansion in the sector," said Rahul Bajoria, MD & Head of EM Asia (ex-China) Economics, Barclays.

Services employment expanded as companies sought to stay on top of their workloads and fulfil rising demand requirements. The rate of job creation was slight and the joint-fastest in six months, the report said.

PMI data shows robust growth in services as well as manufacturing segments in the recent months. However, in both the segments the expansion during June was at a slower pace when compared with May.

Manufacturing MPI declined to 57.8 in June from a 31-month high of 58.7 recorded in the previous month. The PMI print above 50 indicates growth in the sector while below 50 shows contraction.

PMI is a survey-based economic indicator compiled by S&P Global. Services PMI is based on the responses of around 400 service firms from across sectors including finance, insurance, real estate, transport, communication and business services.