India’s services sector growth slows, yet remains strong

India’s services sector growth slowed slightly in May, but still registered the second-strongest rate of growth in nearly 13 years, due to the expansion of new business, as reported by the S&P Global India Services survey released on Monday. The seasonally adjusted services PMI Business Activity Index fell from 62 in April to 61.2 in May, a historically strong performance as output increased at the second-fastest pace since July 2010, driven by favourable demand conditions, new client wins, and positive market dynamics.
The robust performance of the sector is supported by the sustained growth of new business amidst positive demand trends. The rate of new business expansion softened from April’s near 13-year high but remained among the strongest over this period. External demand for Indian services improved in May, as evidenced by a fourth consecutive rise in new export business. Pollyanna De Lima, Economics Associate Director at S&P Global Market Intelligence, interprets the PMI data for May as a “compelling testament to prevailing demand resilience, impressive output growth, and job creation within India’s dynamic service sector.”
The service economy also experienced an increase in inflationary pressures, with stronger increases in both input costs and output charges. Overall input prices rose at a rapid rate that was the fastest since last December, leading to higher reported costs for food, transportation, and wages in May. Companies charged more for their services in May, at a rate matching the fastest in nearly six years. De Lima notes that while increasing output charges may impact purchasing power and economic growth, companies could explore operational efficiencies and alternative sourcing to navigate these challenges.
To accommodate increased new work, companies sought to expand their capacities by hiring more workers. Employment rose at the fastest rate in 2023 so far. Despite the upturn in employment and increased new work, outstanding business also rose midway through the first fiscal quarter. The rate of backlog accumulation was marginal and equal to April. Sub-sector data showed the highest increase in input costs at consumer services companies, while transport, information and communication topped the rankings for charge inflation.
In a joint-best performance in just under 13 years, India’s private sector maintained strong momentum from April, with a business activity expansion rate leading to a reading of 61.6 in May, unchanged from April, on the S&P Global India Composite PMI Output Index. The index reflected a sharper increase in manufacturing production and a slightly slower, but still significant, upturn in services activity. Aggregate new business growth softened from April, but it was still the second-fastest in over 11 years. A quicker increase in factory orders offset a slower but still sharp expansion in demand for services.