Services activity expands at strongest rate in over 11 years in May amid mounting price pressures

India’s services sector activities improved further and expanded at strongest rate in over 11 years in May, supported by a substantial pick-up in new business growth, even as input cost inflation climbed to a record high, a monthly survey said on Friday.

The seasonally adjusted S&P Global India Services PMI Business Activity Index jumped to 58.9 in May, up from 57.9 in April, amid better underlying demand and strong inflows of new work.

For the tenth straight month, the services sector witnessed an expansion in output. In Purchasing Managers’ Index (PMI) parlance, a print above 50 means expansion while a score below 50 denotes contraction.

”The reopening of the Indian economy continued to help lift growth in the service sector. Business activity rose at the quickest pace in over 11 years in May, supported by the fastest upturn in new orders since July 2011,” said Pollyanna De Lima, Economics Associate Director at S&P Global Market Intelligence.

The upturn was supported by a substantial pick-up in new business growth as demand continued to recover following the reopening of the economy after COVID-19 lockdowns, the survey said.

The latest results, however, continued to signal subdued global demand for Indian services, with new business from abroad having now declined in each month since the onset of COVID-19 in March 2020.

On the prices front, the rate of inflation climbed to the highest in 16-and-a-half years of data collection. One-fifth of panellists signalled increases, citing greater food, fuel, labour, material, retail and transportation costs.

”Elevated price pressures continued to restrict business optimism. Despite picking up from April, the overall level of sentiment among service providers was historically subdued,” Lima said.

Despite remaining optimistic towards the 12-month outlook for business activity, firms remained concerned that inflationary pressures would dampen the economic recovery. The overall level of optimism remained subdued by historical standards.

On the jobs front, service providers refrained from taking on additional workers in May. ”In fact, there was a renewed but only marginal decline in employment,” the survey said.

Meanwhile, the S&P Global India Composite PMI Output Index — which measures combined services and manufacturing output — rose from 57.6 in April to 58.3 in May, pointing to the fastest rate of expansion since last November.

Amid a stronger upturn in input prices in the service economy, aggregate cost burdens rose at the fastest rate since March 2011, the survey said.

High inflation had led to the Reserve Bank raising the benchmark interest rate by 40 basis points in an unscheduled review in May. It is expected to take similar measures when the Monetary Policy Committee meets for the bimonthly review on June 8.

According to official data, India’s economy grew by 4.1 per cent in the fourth quarter of 2021-22, pushing up the annual growth rate to 8.7 per cent.