Markets
Services boom may save the day
Summary
To be sure, services exports are gradually recovering from the recent lows, shows data from the Reserve Bank of India.
India’s services sector is firing on all cylinders. The seasonally adjusted S&P Global India Services PMI Business Activity Index rebounded to 61 in September, after moderating slightly in August. A reading above 50 denotes expansion in activity. The latest print is one of the strongest in over 13 years, remaining above the critical level of 50 for 26 straight months. What is more, for the three months ended September, the index has averaged 61.1, which is sequentially high. Clearly, not only is the services activity resilient, but it is also likely improving.
The uptick was broad-based. New business, a key sub-index, rose at the second-fastest pace since June 2010. Further, there was an increase in new export orders, aided by better overseas demand, particularly from North America, Europe and Asia, said the survey report. Meanwhile, the pace of job creation was moderate despite robust order books even though it remains above the long-run average. Another encouraging development is the sizable moderation in input cost inflation to the lowest level since late-2010. If the trend sustains, this will eventually reflect in softer services inflation for the end consumer and will likely help in curbing core (non-food, non-fuel) inflationary pressures in the economy. For now, selling prices of service providers, though solid, was the softest in six months.
To be sure, services exports are gradually recovering from the recent lows, shows data from Reserve Bank of India (RBI). While it was below the double-digit figures seen last year, services export growth stood at a five-month high in August.
Another indicator—scheduled commercial bank credit to the services sector—has been robust, rising by 20.7% year-on-year in August. As such, growth in services sector credit has been in double digits since April 2022, despite a slew of rate hikes by the RBI underscoring the strong demand conditions.
Moreover, services momentum has been resilient even in the backdrop of external headwinds, including global growth concerns and tightening credit conditions. Thankfully, some of them seem to be easing lately. Global economic momentum this year may fare better than previously anticipated. According to the IMF’s July forecast, real GDP growth in advanced economies is now expected at 1.5% in 2023, up from 1.3% projected in April.
Robust services momentum should drive India’s economic growth given the large contribution of the sector in the gross domestic product (GDP). “We maintain our view that services are likely to anchor growth this year (mostly led by domestic demand)," said economists from Barclays Securities (India) in a report dated 5 October.
But what needs closer tracking is whether the strength in the services sector would be enough to compensate for any potential drag from the industrial sector. Here, the manufacturing and construction sectors are relatively more sensitive to interest rates and could face greater headwinds from the higher-for-longer interest rates scenario, both domestic and worldwide. As such, manufacturing activity has already started to show some sign of cooling. S&P Global PMI for the manufacturing sector dipped to 57.5 in September, the lowest reading in the past five months.
Beyond contribution to GDP, the varying speeds of sectoral growth has important ramifications for other aspects of sustainable development like employment and income gains. The significant role of manufacturing and construction industries in employment generation, especially for the low-skilled labour force, means that it is imperative that the sectors get back on track. If not, the economy may feel some pain points even if India’s headline GDP growth outshines its peers, driven by the services engine.
