January 2021: Services Activity Improves

Buoyed by positive sentiment about demand growth and improvements in the wider economy amid the rollout of Covid-19 vaccines, business optimism among India’s service providers rose to an 11-month high in January.

The IHS India Services Business Activity Index rose to 52.8 in January from 52.3 in December as transport and storage and consumer services grew the most last month with increases in business activity and new orders while sharp falls in sales and output were seen in information and communication.

A reading above 50 on the index shows expansion and below it indicates contraction.

“The services sector looks set to sustain growth and confidence towards hiring may improve as Covid-19 concerns diminish,” said Pollyanna De Lima, economics associate director at IHS Markit.

A sister survey on Monday showed a strong growth in India’s manufacturing activity in January as the PMI rose to 57.7 from 56.4 in December.

The yearly SBI Composite Index, an indicator for manufacturing activities in the country, also showed a sustained revival in activity. It rose to 53.8 in January from 53.5 in December.

IHS said that in services, the growth of total new orders was helped by ongoing price discounting strategies. Companies that lowered their fees mentioned efforts to beat competition and attract new customers, according to the survey.

However, employment declined further and exports contracted and the rise in new business was centred on the domestic market. The pace of contraction in exports remained sharp, despite easing to the slowest since last March. Survey participants indicated that travel restrictions and the Covid-19 pandemic dampened international demand for services.

Moreover, input costs increased for the seventh straight month.

“The main area of concern is the extent to which costs are rising across the services economy, with the rate of inflation remaining above trend despite easing from December,” said De Lima.

De Lima added that there are signs that higher costs are preventing firms from taking on additional staff, with the PMI survey showing a second successive fall in employment.

Put together, the Composite PMI Output Index edged up to 55.8 in January, from 54.9 in December as business activity across the private sector expanded at a marked and accelerated pace at the start of 2021. However, private sector jobs fell for the 11th straight month.

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