Job creation has accelerated at the quickest pace since June 2011, says survey

Given that services account for over 53 per cent of the Indian economy today - while industry, which includes manufacturing, accounts for roughly 29 per cent - any contraction in the sector is pretty bad news. The disruptions caused by the new national goods and services tax, which delayed payments between businesses, clients and suppliers, so soon after the demonetisation shock, had spelt a disappointing fiscal year 2017-18 for the services sector. In fact, the Nikkei India Services Purchasing Managers' Index (PMI), a barometer for the sector, fell in four of the 12 months of last year, compared with only twice in each of the two previous years.

But following a modest contraction in February, the latest PMI numbers show that service activity stabilised at the end of the quarter, driven by greater inflows of new work. The seasonally-adjusted Nikkei India Services Business Activity Index rose from 47.8 in February to 50.3 in March. A reading above 50 on the index indicates economic expansion, while a reading below 50 points toward contraction.

"Anecdotal evidence highlighted an improvement in demand conditions," said Aashna Dodhia, economist at IHS Markit, which compiles the survey.  The report added that confidence in the services sector was the highest-recorded since the GST roll-out last July. Moreover, outstanding business in India's service sector reportedly rose in March - the rate of accumulation accelerated to the fastest since last October. "According to panellists, outstanding work increased in tandem with greater volumes of new work and a lack of capacity," said the report.

Reflecting the improved demand conditions and the pressure on current resources, service providers expanded capacity by raising their staffing levels in March. "In response to efforts undertaken by the Indian government to formalise the economy, more people are gravitating towards employment as signalled by the latest PMI data. Indeed, job creation accelerated to the quickest since June 2011," added Dodhia, the author of the report.

The bad news is that India's service sector firms continued to face higher cost burdens during March. Input cost inflation was marked overall, despite softening from February's three-month high. Panellists reported a hike in inputs such as fuel, food items and gold over the survey period. The report added that firms had commented on the pass-through of higher cost burdens to clients "where an increase was registered".  However, "output charge inflation softened to the weakest recorded in three months", partly reflecting easing operating expense pressures.

Meanwhile, the Nikkei India Composite PMI Output Index rose from 49.7 in February to 50.8 in March, driven by growth in the manufacturing sector as well. "New business rose across the manufacturing sector for the fifth consecutive month during March. However, the rate of expansion moderated to the slowest in the current sequence, in part reflecting the weakest gain in new export orders since November," stated the report.

Manufacturers also reduced their staffing levels for the first time in eight months in response to spare operating capacity. Nonetheless, according to Dodhia, output growth in the manufacturing sector again outperformed the service sector, "as has been the case since last autumn".