India’s services finally look up but enough signs of trouble lurk

The seasonally adjusted IHS Markit India Services Business Activity Index saw a sharp rebound from 45.4 in July to 56.7 in August. A reading above 50 indicates expansion and one below this threshold points to contraction.

The latest reading points to a marked rate of expansion that was the fastest in one-and-a-half years. Where growth was reported, panellists mentioned strong inflows of new work and improved dem-and conditions, the report said.

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A key highlight of the August survey was that new orders placed with service providers rose, ending a three-month streak of contraction. Moreover, the pace of expansion was the quickest in more than eight-and-a-half years, said the purchasing managers’ index report.

Sales growth stemmed from greater consumer footfall, the reopening of several firms and successful advertising, according to survey respondents.

This sharp recovery is not surprising considering that the Indian services sector was subject to more stringent restrictions than the manufacturing segment during the pandemic, according to economists.

These green shoots are welcome, but economists pointed to some serious downside risks to the recovery. “The outlook remains clouded by downside risks. While the vaccine roll-out has been gaining momentum, it still isn’t proceeding fast enough to mitigate the threat of further virus waves. The experience in Kerala is a case in point,” said Darren Aw, Asia economist at Capital Economics Ltd, a research consultancy.

“Recorded infections have jumped sharply again as testing has been ramped up. The big concern is whether this will eventually spread across the country. If restrictions are tightened once again, firms in the services sector would again be hit the hardest, especially those that are dependent on physical interaction such as retail and leisure,” he said.

Recent media reports state that the Maharashtra government may consider reimposing night curfew and other curbs to avoid a potential third wave.

“The report wasn’t blemish-free, however, as new export orders continued to sag,” said Miguel Chanco, senior Asia economist at research firm Pantheon Macroeconomics.

True, the August reading was much higher than their already punchy forecast of 54. “All told, the brisk rate of services growth signalled last month likely isn’t sustainable, as it probably was flattered significantly by base effects, following three straight months of hefty declines,” Chanco said.

Nonetheless, business sentiment among service providers has also jumped from contraction to expansion in August. That said, it remains lower than that of its Asian peers.