Services PMI falls for first time in 8 months as domestic demand disappears, export orders nosedive

PMI concept 3D illustration (Source: ShutterStock)

Muted domestic demand and a drop in international orders led to service activity in the economy contracting for the first time in eight months in May.

According to the monthly IHS Markit India Services Purchasing Managers’ Index (PMI) survey released on June 3, services PMI stood at 46.4 in May, down from 54 in April. In PMI parlance, a print above 50 means expansion, while a score below that denotes contraction.

As the growth of new work intakes ground to a halt in May, PMI survey respondents noted the first decline in sales since September 2020. The sudden drop in demand was due to the intensification of the COVID-19 crisis.

International demand for Indian services also worsened, with new export business falling at the quickest rate in six months. The drop was attributed to international travel restrictions and business closures.

"The intensification of the COVID-19 crisis and associated restrictions suppressed domestic and international demand for Indian services. Total sales decreased for the first time in eight months, while the fall in external orders was the most pronounced since last November,"  said Pollyanna De Lima, principal economist at IHS Markit and author of the report.

Data released two days back showed manufacturing activity had also fallen to a 10-month low in May.

Rising worries related to the pandemic and falling sales led to services companies reducing workforce numbers yet again in May. While the decline was modest, it was still the quickest in the current six-month sequence of job shedding, the PMI survey stressed. Concerns over the outlook, evidenced by a dip in sentiment, could prevent job creation in the near term, De Lima added.

While the constant rise in input costs continued, it was the slowest since January. But businesses struggled to raise selling prices meanwhile increased only slightly as several companies left their fees unchanged due to subdued demand conditions.

Real Estate & Business Services was the worst-affected segment out of the five monitored categories, recording the quickest declines in both new business and output. On the other side of the spectrum was Transport & Storage, where substantial increases in activity and sales were registered.

The seasonally adjusted Nikkei India Composite PMI Output Index, which calculates growth after considering manufacturing and services indices relative to the size of GDP, fell to 48.1 in May from 55.4 in April, signalling a slowdown in private sector output growth.

This was chalked up to aggregate new orders decreasing for the first time in nine months, albeit at a moderate pace. The downturn was centred on the service sector, with factory sales rising only marginally at manufacturers in May.

Worryingly, the PMI survey repeatedly drew public attention to the broad-based decline in employment among goods producers and services companies. As of May, private sector jobs fell for the fifteenth month in succession. While the rate of reduction was modest, it was still the quickest since last October.