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In a sign that contact-intensive services are finally gathering momentum, a survey said on Friday that services sector activities in India expanded at the strongest rate in over 11 years in May. The sector has remained on an expansion mode for the tenth straight month.

The growth was supported by a substantial pick-up in new business, even as input-cost inflation climbed to a record high. Of course, elevated prices continue to dent business optimism among service providers. Subdued global demand for Indian services is another worry.

The seasonally adjusted S&P Global India Services PMI Business Activity Index jumped to 58.9 in May, up from 57.9 in April, “amid better underlying demand and strong inflows of new work”.

In Purchasing Managers’ Index (PMI) parlance, a reading above 50 indicates expansion while one below 50 denotes contraction.

In fact, a healthy growth in contact-intensive services had boosted overall supply-side growth in Q4FY23, despite the Omicron wave. Among such services, the “trade, hotels, transport, etc” segment, which remained a laggard for long, also crossed the pre-pandemic mark in the quarter, growing 5.3% on year. Of course, the growth in gross value added in the segment sequentially declined from 34.4% in Q1FY23 to 9.6% in Q2 and further to 6.3% in Q3, partly due to the waning of a fabourable base.

However, this segment in FY22 as a whole was still 11.3% below FY20, the year immediately before the pandemic. Many analysts believe that the contact-intensive sectors will a give a fillip to growth in Q1 and for the whole of FY23.

According to the data on national income released on Tuesday, on the output side, the weakest sector was “financial, real estate and professional services” with a growth of 4.2% in FY22.

“The reopening of the Indian economy continued to help lift growth in the services sector. Business activity rose at the quickest pace in over 11 years in May, supported by the fastest upturn in new orders since July 2011,” said Pollyanna De Lima, economics associate director at S&P Global Market Intelligence.

The latest PMI print, however, revealed new business from abroad has declined in each month since the onset of Covid-19 in March 2020.

On the prices front, the rate of inflation climbed to the highest in 16-and-a-half years of data collection. One-fifth of panellists signalled increases, citing greater food, fuel, labour, material, retail and transportation costs. “Despite picking up from April, the overall level of sentiment among service providers was historically subdued,” Lima said.

On the jobs front, service providers refrained from taking on additional workers in May. “In fact, there was a renewed but only marginal decline in employment,” the survey said.

Separately, the Centre for Monitoring Indian Economy (CMIE) said on Friday that the country’s unemployment rate fell to a four-month low of 7.12% in May, due to increased hiring in a range of sectors.

Meanwhile, the S&P Global India Composite PMI Output Index – which measures combined services and manufacturing output – rose from 57.6 in April to 58.3 in May, pointing to the fastest rate of expansion since last November.

The seasonally-adjusted S&P Global India manufacturing PMI had eased just a tad to 54.6 in May from 54.7 in the previous month. But it still remained well over the trend average, pointing to a “sustained recovery” across the sector.

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Author: Howard Caldwell