The recent contraction of activity in India’s services sector has sparked conversations and concerns among economies worldwide. According to IHS Markit India Services Business Activity Index, also known as Service Purchasing Managers’ Index (PMI), there has been a decline in the services sector for the fourth consecutive month in June 2020. This downturn is largely associated with the disruptive effects of the Covid-19 pandemic, which has significantly hampered new work orders and business operations.
About PMI and Its Significance
Compiled by IHS Markit for over 40 global economies, the PMI is an invaluable index that deciphers the direction of economic trends within the manufacturing and service sectors. It comprises a diffusion index that encapsulates market conditions as perceived by purchasing managers – whether they are expanding, remaining constant, or contracting.
The PMI’s primary purpose is to feed current and future business conditions to company decision-makers, analysts, and investors. However, it should not be confused with the Index of Industrial Production (IIP) as both gauge different levels of economic activity. In comparison with the IIP, which covers the broader industrial sector, PMI is more dynamic.
Current Scenario of India’s Service Sector
In June 2020, The IHS Markit Services PMI experienced a rise to 33.7 from 12.6 in May 2020. This indicated a modest recovery from the previous month. However, any reading below 50 on this survey-based index suggests contraction. A record low was marked in April 2020 when the index stooped to 5.4.
While the decline’s pace has slowed down, reflecting a stabilization in activity levels, closures, and temporary suspensions continue to cause concerns. Furthermore, the report shows that 59% of firms reported no output change since May, 4% registered growth, and 37% recorded reduction.
Reasons for the Contraction
Several factors have contributed to this downturn. These include a sharp fall in total new orders due to changing consumption habits, business closures due to unfavorable conditions, a steep drop in export sales, job losses resulting from diminished business requirements and poor staff availability.
Importance of Service Sector
The performance of the service sector holds significant importance in determining a country’s economic status. In India, it accounts for two-thirds of the total foreign direct investment inflows and roughly 38% of the nation’s exports. With a 57% share in Gross Domestic Products (GDP), the service sector surpasses the industry and agriculture sectors.
Composite PMI Output Index
The Composite PMI Output Index, which amalgamates metrics from both the services and manufacturing output, rose to 37.8 in June from 14.8 in May. However, the figure of 37.8 is still below the critical 50 level, indicating contraction. The manufacturing PMI, which registered at 42.7, indicates a moderate fall in manufacturing production.
The Path Ahead
Despite the deterioration being less severe than in April and May, the latest reduction remains considerably stronger than any witnessed before the virus outbreak. To manage the risk of an extended recession acknowledged by firms, it becomes crucial to uplift the expectations of service sector activities by instilling business confidence.