Service sector

Services sector grows in May despite “unprecedented” inflation; Services PMI hits 11-year high at 58.9

India’s services sector grew in May at the fastest pace in 11 years, driven by a substantial pick-up in new business growth amid picking up demand after the economy reopened after COVID-19 shutdowns, according to monthly survey results.

The seasonally adjusted S&P Global Services PMI business activity index came in at 58.9 in May, down from 57.9 in April. Anecdotal evidence suggests that the resumption of production reflects better underlying demand and strong inflows of new jobs and service providers mentioned that demand continued to strengthen after the lifting of restrictions related to the pandemic, according to investigation.

Soaring inflation bolsters business confidence

Growth in the services sector despite “unprecedented” high inflation is impacting business confidence, according to the survey results. Last month was the 23rd consecutive month of rising input prices for service providers.

“The outlook for inflation appears to have deteriorated as input prices rose at the fastest pace in survey history. Service businesses again reported substantial pressure from the costs of food, fuel, inputs, labor, and transportation,” said Pollyanna De Lima, associate director of economics at S&P Global Market Intelligence. “Exit fee inflation eased only slightly to from April, being the second highest in just under five years, with several companies citing the need to pass on rising costs to customers,” she added.

“Consumer services remained the brightest spot in the services economy, posting the largest increases in both new business and output in May. It is here too that the rate of cost inflation highest input was observed,” De Lima said in the statement.

Companies continue to pass on high prices to customers

Service companies continued to pass on rising cost burdens to customers by raising their selling prices, with overall cost burdens growing at the fastest rate since March 2011. This is a slight change from to April, as the overall rate of inflation for charges was the second highest in nearly five years, according to the survey results. Compared to the service sector, there is a slight slowdown in cost inflation in the manufacturing industry.

However, service providers refrained from hiring additional workers in May and there was a further, but only marginal, drop in employment, according to the survey.

Rising inflationary pressures are worrying the government as well as the central bank. In next week’s RBI monetary policy, economists expect RBI to raise interest rates to control inflation. Economists estimate that inflation will remain above the upper limit of 6% set by the central bank this year.