Services PMI contracts for second straight month in October on muted demand

Activity in India's dominant services industry contracted for a second consecutive month in October due to muted demand, a private business survey showed on Tuesday, driving business optimism to a near-three year low.

Although the Nikkei/IHS Markit Services Purchasing Managers' Index rose to 49.2 last month from 48.7 in September, it remained below the 50-mark threshold separating contraction from growth on a monthly basis.

The last time services activity contracted for two consecutive months was in August 2017 following the hasty implementation of a Goods and Services Tax (GST).

A sub-index tracking demand showed new business barely grew last month.

That, alongside a manufacturing slowdown, dragged a composite index to a more than two-year low of 49.6, pointing to further weakness in Asia's third-largest economy after growth fell to a six-year low of 5% in the April-June quarter.

"It's somewhat worrying to see the Indian service sector stuck in contraction, as firms react to muted demand by lowering business activity," said Pollyanna De Lima, principal economist at IHS Markit, in a press release.

"Perhaps even more concerning was the downward revision to future expectations, given the possible detrimental impact of subdued business confidence on investment and jobs." Optimism about the coming year faded to its lowest since December 2016 and firms increased headcount at the joint-weakest pace in over two years.

The survey findings indicate 135 basis points of interest rate cuts by the Reserve Bank of India this year and recently announced reforms by the government have so far done little to boost business activity.

Weak demand also forced firms to absorb much of a jump in input costs, which increased at the quickest pace in a year, squeezing profit margins.

"Still, this was not sufficient to generate new work and we might see selling prices being discounted in the coming months as competitive pressures build up," added De Lima.

No jobs? Hiring by services firms hit 6-month low in March, reveal PMI data

The services industry, the dominant sector of the Indian economy, grew at a six-month low pace in March due to slower expansion in new work, showed widely-tracked Nikkei purchasing managers' index (PMI).

This affected jobs as hiring activity by services companies also hit a six-month bottom, with 94 per cent firms not even employing a single additional hand in this month.

The seasonally adjusted Nikkei India Services Business Activity Index fell to 52 in March from 52.5 in February, indicating slowest expansion since last September.

Despite the moderation, the services PMI was in the expansion territory for the 10th straight month. In PMI parlance, a print above 50 means expansion, while a score below that denotes contraction.

"Indian service sector growth weakened at the end of the fourth quarter of FY18, with activity expanding at the slowest rate since last September," said Pollyanna De Lima, Principal Economist at IHS Markit, author of the report.

Separate PMI data for manufacturing, issued a couple of days back, showed that factory activities also grew at a six-month low in March. As such, the composite PMI output index, that maps the private sector activities, dipped from 53.8 in February to a six-month low of 52.7 in March.

This pointed to a slower upturn in private sector output and rounded off a weaker quarterly performance in Q4 than registered in Q3 FY'19. PMI survey is based on the responses from the private sector.

Meanwhile, optimism regarding the year-ahead outlook for business activity strengthened for the second month in a row.

"Business expectations strengthened in March, indicating that services companies are hopeful that conditions will advance in the months to come. However, an anemic pace of job creation hints that service providers are not fully convinced about a shift into a higher growth gear," Lima said.

"Digging deeper into the anecdotal evidence provided by surveyed firms, there are concerns about delayed payment from clients and a challenging economic situation," Lima said.

Firms commented that successful marketing efforts and greater demand underpinned the rise in sales, but some noted that an increasingly competitive environment acted as a brake on growth.

On the prices front, input cost inflation eased, while an acceleration was seen for services charges.