Private sector activity contracts for first time in 14 months

Private sector output slowed in June to the lowest level since April 2014 as slow output in services contributed to composite PMI slipping below the crucial 50 reading.

Further contraction in new businesses brought Nikkei Services Business Activity Index, previously known as HSBC Services PMI, down to 47.7 in June against 49.6 in April. The composite PMI also fell to 49.2 in June from 51.2 recorded in May. 

PMI, which measures economic health of a sector based on surveys of private sector companies, fell to a reading of below 50, which denotes contraction for the second straight month.

The report stated that business activity declined in five of the six monitored categories, the exception being hotels and restaurants.

Manufacturing sector PMI released early this week also slowed due to a weaker pace of increase in new orders.

Relaying optimism in the economy, Pollyanna De Lima, economist at Markit, said, "The heat-wave and competitive pressures were again reported to have weighed on service providers’ performance. However, companies are hopeful of turning the corner in the coming months, with confidence regarding the 12-month outlook remaining strong."

Employment numbers still remain a concern. The report highlighted that Indian service providers raised employment further in June while employment levels in manufacturing haven't changed since last January. The rate of job creation was, however, only marginal and slower than the long-run series average. 

While better-than-expected monsoon leaves some wiggle room for the RBI to cut rates, falling output in services, which is the biggest contributor to GDP, is a problem for the government. The latest report of index of eight core industries for May showed some optimism for manufacturing after a dismal start to the fiscal, but weak global recovery may hurt the profitability of the manufacturing sector in the coming months. 

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