India Sees Positive Trend as Service Sector Expands

June 6, 2014 Posted by India Briefing Reading Time: 4 minutes

DELHI – Activity in India’s service sector has expanded for the first time in 11 months, according to an index released on Wednesday.

The HSBC Services Purchasing Managers’ Index (PMI), which gathers data from approximately 350 companies and was compiled by Markit, rose from 48.5 in April to 50.2 in May.

Having a score above 50 indicates growth rather than contraction and this month’s index marked the first expansion since June last year. The PMI also found that input costs and prices charged by services companies rose at a slower pace during May. Growth in the service sector was due to several factors, including rising client demand, an increase in the number of new businesses, and a surge of new orders.

The service sector, which constitutes about 60 percent of the country’s overall GDP, had stalled in the past year. Last month’s growth will therefore be met with optimism that the Indian economy will be able to overcome recent problems such as high inflation, a weak currency and a fall in foreign investment.

“At last, a gradual improvement in services activity, with the index creeping above the 50 level after nearly a year,” said Frederic Neumann, co-head of Asian Economic Research at HSBC. “Fortunately, this momentum will be further supported by the strong election results.”

Last month saw a landslide victory for pro-business Narendra Modi and the Bhartiya Janata Party, leaving investors optimistic about India’s economic prospects. Modi is taking leadership of the country against a backdrop of difficult economic times for India, including two consecutive years of sub-5 percent expansion. However, these indications of growth, along with hopes that Modi’s majority government will provide the stability needed to enact economic reforms, are bound to instill analysts and experts with hope about the future of the country’s economy.

The confidence and optimism felt by companies themselves was apparent in the index. HSBC found that service providers believed that activity would increase in the next year, helped by marketing campaigns and the launch of new services.

The services sector constitutes a vital part of the Indian economy due to its substantial contribution to both GDP and employment. According to the National Council of Applied Economic Research (NCAER), the sector is forecast to grow by 5.6 percent during the financial year 2014-15. India’s export of software and IT services alone was US$56.74 billion in the financial year 2012-13, according to the Reserve Bank of India (RBI).

Earlier this week, it was revealed that a similar HSBC/Markit PMI for the manufacturing sector inched up to 51.4 in May from 51.3 in April, fuelled by higher domestic and export orders. Although this was slightly less than the 51.6 mark that was predicted by Reuters, it still marks expansion in the sector, which accounts for around 25-30 percent of India’s overall GDP.

The survey also found that manufacturing firms increased their workforce numbers and input prices rose at their slowest rate in over a year. The composite output index,which compiles data from both the manufacturing and services sectors, rose from 49.5 to 50.7 points between April and May, showing expansion overall in these sectors for the first time in three months.

Meanwhile, the eight industry core sector index, which includes electricity, cement, fertilizers, coal, crude oil, steel, refinery and natural gas, increased by 4.2 percent in April. The index was boosted by higher electricity, fertilizer and cement production, which had growth rates of 11.2 percent, 11.1 percent and 6.7 percent respectively.

Furthermore, according to new data from the Apparel Export Promotion Council (APEC), India’s share of global textile trade increased by almost 18 percent between 2012 and 2013. As a result, India has emerged as the world’s second largest textile exporter behind China.

Following good economic news over the past month, Citigroup and Nomura have both recently raised their forecasts for Indian economic growth in the 2016 financial year to a healthy 6.5 percent, from their original predictions of 6.2 percent and 5.7 percent respectively.

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