2018 begins with a glimmer of hope: Services sector growth improves in Dec

India’s economy has a reason to cheer in the New Year with its biggest sector – services - rebounding to growth in December from contraction in November, though the expansion is moderate, according to a widely-tracked Nikkei Purchasing Managers’ Index (PMI).  With manufacturing sector posting five-year high growth in December, the combined expansion in the two sectors was the fastest since October 2016, the month of demonetisation.

Higher activities in services led to increased hiring by firms with jobs growth quickening to the fastest since September, the PMI survey of 400 private sector firms showed. However, effects of the goods and services tax (GST) still persist, since a large chunk of the improvement in PMI account delayed payments from previous months, and cash shortage still not abated.

PMI for services grew from 48.5 in November to 50.9 in December. A PMI above 50 represents expansion or growth, while that below 50 indicates contraction.

A co-improvement in both the sectors bodes well for the Advance Estimate of gross domestic product in the current financial year, wherein the  Narendra Modi government saw the lowest  growth in its tenure at 5.7 per cent in July-September 2017 in its over three years of rule.

December 2017 is the first time since demonetisation that manufacturing and services have shown a simultaneous expansion which was neither due to the immediate recovery effect post-demonetisation or GST implementation.

Business activity in the services sector, which dealt with two major blows of contraction — one after demonetisation and other after GST implementation — had shown a dip in November 2017, too, (see chart), indicating a sustained impact on services post-GST, especially in the IT/ITeS domain.

The uptick in December PMI for services was held by information and communications, finance and insurance sub-sectors. But the GST still continues to “weigh on underlying sales volumes” resulting in decline in new contracts, a report by the IHS Markit, a compiler of PMI, said.

Aashna Dodhia, author of the December report and an economist at IHS Markit, terms the December improvement as a marginal expansion.

“India’s service economy…remained on a weak growth trajectory amid reports that the GST was still hindering efforts to secure new clients,” she added.

While expansion in services was marginal, that in manufacturing was best in the past five years, indicating stronger demand from the domestic and global market, says the report.