India’s service sector’s performance has been in line with the global standards, according to a paper published by Reserve Bank of India researchers in the August Monthly Bulletin.
The paper on estimating spare capacity, which determines how much of an increase in output can be achieved with existing conditions in case demand increases, found that Indian service sector companies were operating with 11-14 percent spare capacity.
This figure corresponds with the global average, which includes regions like the European Union and countries like Turkey.
As per calculations by RBI researchers, India’s spare capacity had declined to a 10-quarter low of 11.3 percent in Q4FY24 compared with 11.7 percent in the previous quarter.
The paper finds that while spare capacity for firms had increased to 25 percent during Q1FY22, when India was dealing with the second wave of Covid, it had declined to 11.1 percent in the following quarter, before rising back to 17.4 percent during the Omicron wave.
India is now testing the lower limits of that spare capacity.
Data from private surveys shows that hiring seems to have picked up in the first four months of the year, as employment levels were much higher between April-July, than the previous year.
“A comparison of the spare capacity for manufacturing in India (converted from CU using method explained above) with the survey outcome on the services SC reveals that, the SC for manufacturing sector in India exceeds that in the services sector across all quarters,” RBI said.
A lower spare capacity indicates that companies will have to deploy resources faster, leading to an increase in output prices.
The manufacturing sector equivalent of capacity utilisation, which shows how much of capacity has been utilised by firms, found that capacity utilisation had hit 74.6 percent in Q4FY24, closer to 80 percent level, when firms start making capex to add more capacity.
Spare capacity seems to be teetering at three-year average levels in services as well, which may prompt to higher employment.
One of the planks of the Budget was to increase employment, even as the Economic Survey 2023-24 noted that India needs to add close to 7.9 million jobs each year till 2036.
“The information obtained coupled with the capacity utilisation for manufacturing sector can strengthen inputs for understanding of inflation and output dynamics and for policy formulation,” said RBI researchers.
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