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Services sector PMI falls most in 4 years on GST
August, 04th 2017

After the manufacturing sector, India’s services sector also plunged into the contraction mode in July with the sharpest fall in about four years as confusion caused by the GST rollout triggered a dip in new business orders, a monthly survey said. The Nikkei India Services Purchasing Managers’ Index (PMI), a measure of services sector output on a monthly basis, plunged to 45.9 in July, the lowest since September 2013, from June’s eight-month high of 53.1. The data follows a similar downtrend seen in the manufacturing sector, which also contracted in July following the implementation of GST resulting into significant drop in new orders and output.

A reading above 50 indicates expansion, while a score below this mark means contraction. This is the first time in six months that the services index has slipped into contraction territory. The July services PMI also signalled the first downturn in output since the start of this year. “PMI data for July highlight a reversal in fortunes across India, with the economy going into the reverse mode after seeing a pick-up in growth momentum during June,” said Pollyanna De Lima, principal economist at IHS Markit.

The launch of GST was cited by services firms covered in the survey as having caused contraction in new work orders, leading to lower activity. The seasonally adjusted Nikkei India Composite PMI Output Index — which maps both manufacturing and services — fell sharply in July to 46.0, the lowest since March 2009. The index read 52.7 in June this year.

“Private sector activity dipped for the first time since the demonetisation shock and to the greatest extent since early 2009, mirroring the sales trend,” Lima added. Indian service providers, however, remain optimistic about the 12-month outlook. “Whereas many will question how deep an impact the GST will have on the economy in the near and long term, firms seem convinced that prospects will brighten as the new tax regime becomes clearer,” Lima said.

India’s manufacturing sector slumped to its lowest level in July — its lowest mark since February 2009 — dragged down by disruptions to business activity following the introduction of GST. The Nikkei India Manufacturing Purchasing Managers’ Index (PMI) stood at 47.9 in July, down from 50.9 in June, and highlighted the first deterioration in business conditions in 2017 so far. Following the GST launch, new orders and output dropped for the first time since the downturn in December last year post demonetisation.

The PMI data for manufacturing and services sector will also bolster calls for further rate cuts by the Reserve Bank, which lowered its key lending rate by 0.25 per cent, a move which is likely to translate into lower interest rates for home, auto and other loans as also boost economic activity. Financial services major Nomura said the decline in the services index was entirely due to the GST introduction. Noting that the services firms expressed “a lack of knowledge regarding the GST and expect more clarity in the near term to lead to activity growth”, Nomura said the drop in activity in July is expected to be transitory.

On the price front, the input price index eased marginally to 51.7 in July from 52.3 in June, but the output price index rose sharply to the highest since early-2013 to 54.6 from 51, as firms cited a higher tax burden on account of the GST.

 
 
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