India's services sector growth eases slightly in July; rising costs, robust demand push up inflation

New Delhi: India's services sector growth recorded another month of robust expansion in July, albeit at a slightly slower pace than in June, largely supported by robust demand conditions and investment in technology, a monthly survey said on Monday.

The seasonally adjusted HSBC India Services Business Activity Index was at 60.3 in July, down only fractionally from 60.5 in June.

In the Purchasing Managers' Index (PMI) parlance, a print above 50 means expansion, while a score below 50 denotes contraction.

"Service sector activity rose at a slightly slower pace in July, with new business increasing further, primarily driven by domestic demand. Looking ahead, services firms remained optimistic about the outlook for year ahead," Pranjul Bhandari, Chief India Economist at HSBC, said.

New export orders increased at the third-strongest pace since the inception of the series in September 2014, amid strengthening demand for Indian services from across the world. Some of the sources of rising export orders mentioned by panellists included Austria, Brazil, China, Japan, Singapore, the Netherlands and the US.

Favourable economic conditions and optimistic expectations for output supported recruitment among services firms, the survey said.

On the price front, higher wage and material costs continued to push up business expenses, with the overall rate of inflation quickening from June. Stronger cost pressures and positive demand trends contributed to the steepest rise in prices charged for the provision of services for seven years.

Looking ahead, services firms remained strongly optimistic about growth prospects. Around 30 per cent of the survey panel forecast greater output volumes in the next 12 months, while only 2 per cent expect a decline.

The overall level of sentiment rose since June and was aligned with its long-run average. Anecdotal evidence suggested that confidence in the outlook for demand and sales, alongside improved customer engagement and new enquiries, boosted optimism.

Meanwhile, the HSBC India Composite Output Index posted 60.7 in July, down only fractionally from 60.9 in June and above the crucial 50.0 no-change mark for the thirty-sixth month running.

"India's composite PMI recorded another month of robust expansion in July, albeit at a slightly slower pace than in June," Bhandari said.

Composite PMI indices are weighted averages of comparable manufacturing and services PMI indices. Weights reflect the relative size of the manufacturing and service sectors according to official GDP data.

Robust demand conditions, reflected by increased new orders from both domestic and international markets, led firms to increase hiring levels, Bhandari said, adding that on the price front, higher wages and material costs led to a further increase in input costs. Consequently, output prices rose at the fastest pace in over 11 years.

The HSBC India Services PMI® is compiled by S&P Global from responses to questionnaires sent to a panel of around 400 service sector companies.