Services growth picks up, hiring rises: What India’s August PMI shows

India’s services sector regained some momentum in August, but growth remained subdued as weak demand continued to weigh on new business, even as companies stepped up hiring, a monthly survey showed on Thursday.

The HSBC India Services Purchasing Managers’ Index (PMI), compiled by S&P Global, rose to 54.1 in August from 53.3 in July. However, the final reading was below the preliminary estimate of 54.5 released in August.

A PMI reading above 50 indicates expansion, while a reading below 50 points to contraction.

The latest data suggest that India’s services sector continues to expand, but the pace remains close to its weakest level in more than four years. The headline index was also only marginally above its long-run average.

Demand remains the weak spot

The biggest concern in the August survey was new business.

New business, a key measure of underlying demand, increased at its second-slowest pace in more than four years. This suggests that the improvement in overall services activity was not supported by a strong revival in demand.

International demand offered little relief. New export orders expanded at broadly the same pace as in July, indicating that external demand remained relatively steady rather than providing a significant boost to services companies.

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The weakness in demand comes even as India posted strong economic growth in the April-June quarter.

India’s GDP expanded 7.8 per cent in the first quarter of the current financial year, beating market expectations. The stronger-than-expected growth had raised hopes that domestic economic activity could remain resilient despite a difficult global environment.

However, high energy prices, a weaker rupee and continuing geopolitical uncertainty are expected to put pressure on growth in the months ahead.

A Reuters poll showed India’s economy is expected to grow 6.7 per cent in the current fiscal year, slower than the pace recorded in the April-June quarter.

Hiring rises at fastest pace in 15 months

Employment provided one of the strongest positive signals in the August PMI survey.

Services companies increased hiring at the fastest rate in 15 months. The rise suggests that businesses retain some confidence in the medium-term outlook despite the slowdown in demand growth.

Higher employment could also support household incomes and consumption, although the impact will depend on whether the pickup in hiring is sustained in the coming months.

The stronger hiring trend stands in contrast to the cautious tone in business sentiment.

Business confidence remained below its long-run average for the second consecutive month. Companies were nevertheless cautiously optimistic that market conditions and demand would improve.

Cost pressures start building

Services firms also faced a modest increase in input costs during August.

Prices charged to customers rose at the fastest pace since March as companies passed on some of their higher operating expenses.

The increase in selling prices is an indication that cost pressures have not disappeared, even as demand remains relatively weak.

For policymakers, this creates a delicate balance. Stronger price pressures could make it harder to support demand through easier monetary conditions, while weaker new business points to softer economic momentum.

Manufacturing slowdown offsets services improvement

The broader private-sector picture was less encouraging.

India’s Composite PMI, which combines services and manufacturing activity, remained unchanged at 54.3 in August.

The unchanged reading masks a sharp divergence between the two sectors.

While services activity improved, manufacturing growth fell to a five-year low as demand weakened. The slowdown in factories offset the improvement in services and kept overall private-sector growth unchanged.

This means the services sector had to accelerate simply to prevent the composite index from declining.

What the August PMI means for India’s economy

The August PMI points to an Indian economy that remains firmly in expansion territory but is losing some of the momentum seen earlier in the year.

The services sector continues to be the main engine of private-sector activity. The pickup in hiring is encouraging and suggests companies are still willing to expand their workforce.

But weak new business growth, subdued international demand and below-average business confidence point to a more cautious outlook.

The data also highlight the challenge facing the economy as it enters the later part of the financial year.

India has demonstrated resilience despite global trade disruptions, geopolitical tensions and higher energy prices. But elevated oil prices are particularly important for India because of its dependence on imported crude.

A weaker rupee can further increase the domestic cost of imports, putting pressure on businesses and consumers.

(With inputs from agencies.)