India\'s services activity contracts in June for first time in a year
Photo Credit: Reuters

India’s dominant services activity contracted for the first time in more than a year in June, dragged down by slowing new business growth which in turn curtailed hiring, a private survey showed on Wednesday.

The Nikkei/IHS Markit Services Purchasing Managers’ Index fell to 49.6 last month from 50.2 in May, sliding below the 50-mark threshold that separates contraction from growth after remaining in expansion territory for the previous 12 months.

“In the service sector there was an outright contraction in business activity, which was prompted by broadly stagnant sales,” said Pollyanna De Lima, principal economist at IHS Markit, in a press release.

“It’s somewhat surprising to see some companies linking subdued demand to high tax rates, two years on from the GST (Goods and Services Tax) implementation, with the hotel tax mentioned in particular.”

Overall demand in the sector - measured by the new business index - expanded at the weakest pace in nine months while foreign demand grew at the slowest rate since February.

That was partly due to a slight increase in price pressures. However, the marginal pick up in the rate of price rises is unlikely to give a big boost to overall retail inflation, which has stayed below the Reserve Bank of India’s medium-term target of 4% for almost a year.

Weak demand, along with fading optimism about future activity, led services firms to hire at the slowest pace in nearly two years.

A composite index tracking both factory and services activity sank to a 13-month low in June due to the services sector contraction and weaker expansion in manufacturing, indicating a further slowdown in the economy.

The composite PMI fell to 50.8 in June from 51.7 in May.

That might encourage the central bank, which has already cut rates three times this year, to deliver more policy easing to prop-up the slowing economy.

“Services companies are hoping that some stimulus will boost demand in the coming months, translating into output growth, though confidence about the future also started to fade,” said De Lima.

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