India's service sector has contracted for the first time in more than two years as new business all but dried up and expectations weakened amid concern over a flagging world economy, a survey showed on Wednesday.
The seasonally adjusted HSBC Markit Business Activity Index, based on a survey of around 400 firms, plunged in September to 49.8 -- its lowest reading since April 2009 -- and below the 50 mark which separates growth from contraction.
The index was at 53.8 in August.
"The slowdown in growth has continued to broaden with the service sector seeing a further slowdown in economic momentum," said Leif Eskesen, economist at HSBC.
Emerging economies like China and India that have been offshore hubs for companies in the west are feeling the pinch as growth in new business has slowed and the expectations index declined sharply in September.
Service providers were less sure about next year as worries over a festering debt crisis in Europe deepened coupled with a possibility of another recession in the United States.
The new business sub-index sank to a 28-month low of 51.6 in September, down from 54.9 in August. The weak expansion in new business -- the main cause of the stagnation in activity -- meant employment levels fell for a third consecutive month.
Despite harsh conditions firms were able to pass on rising input costs to customers, albeit at a slightly lower pace than in August.
Inflation accelerated to its highest in more than a year, up 9.78 per cent in August from a year ago versus July's 9.22 per cent, as commodity prices continued to go higher.
"Inflation pressures remain firmly in place," said Eskesen. "While both input prices and prices charged grew at a slower pace, they stayed high by historical standards."
"We are getting close to the end of the Reserve Bank of India's tightening cycle, but we are not quite there yet," he added.
With inflation at more than twice its comfort level and showing no signs of abating, the RBI is in an awkard position of fighting high prices with rate hikes and combating growth slowdown as global outlook worsens.
The central bank stunned investors last month with its 12th rate increase in 18 months but banks are reluctant to pass on the raise to borrowers fearing a higher probability of defaults.
Only two private banks, ING Vysya Bank Ltd. and Dhanalakshmi Bank, raised loan rates while others held tight after the RBI increased the repo rate to 8.25 per cent in September.
A similar survey for manufacturers fell sharply last month to its lowest level since March 2009 with marked declines in output and new orders, data showed on Monday.