Domestic demand, easing costs bolster services in Aug

• Activity levels hit a five-month peak as per a private survey, but optimism levels at 13-month low, with new export orders and job creation the weakest in six and four months, respectively

Highlights:

• India’s services sector saw a significant acceleration in business activity in August, reaching a five-month high, driven by increased productivity, reduced cost pressures, and strong domestic demand. However, despite the improved performance, business confidence among services firms hit a 13-month low, and optimism across the broader private sector, including manufacturers, dropped to its lowest in 15 months.

Key Findings

1. Services Sector Performance

• The HSBC India Services Business Activity Index, which is based on a survey of over 400 private firms, rose to 60.9 in August from 60.3 in July. This marks a notable expansion in activity as a reading above 50 signifies growth. The August growth was mainly propelled by increased domestic orders, despite 5% of surveyed firms reporting a decline in order books and a slowdown in fresh export business, which hit a six-month low.

2. Overall Private Sector Activity

• Private sector activity, including manufacturing, showed no significant change from July, with the HSBC India Composite Output Index recording a reading of 60.7 in August. While the services sector expanded, factory output grew at its slowest pace in seven months, which tempered the overall performance.

3. Cost Pressures and Input Prices

• Cost pressures eased significantly in August, with input costs rising at their slowest pace in four years for the services sector and six months for the overall private sector. However, despite this, certain segments, particularly consumer services, reported sharp increases in input costs related to food, labor, and transportation. Inflation, however, was at its weakest level since August 2020.

4. Pricing and Hiring Trends

• Although many firms had raised prices in July, particularly in the transport and communication sectors, less than 4% of businesses increased their prices in August. Additionally, while services firms continued to hire, the pace of employment growth fell to a four-month low. Outstanding business volumes also grew at their slowest rate since February.

Sectoral Insights

• Finance & Insurance
• The Finance and Insurance sectors emerged as the top performers, registering the strongest growth in both output and new orders. In contrast, consumer services faced the highest uptick in input costs.

Domestic vs. Export Demand

• The August growth was mainly driven by domestic demand, with new orders reaching their highest level since April. However, export demand weakened, exhibiting the slowest growth in six months.

Business Outlook

Declining Optimism

• Business confidence has taken a significant hit, with only 21% of service providers expecting an increase in output over the next 12 months, down from 30% in July. While only 1% of firms expect a decrease in output, concerns over competitive pressures were noted as a key reason for the lowered expectations.

Prelims Takeaways:

• HSBC India Composite Output Index
• Service Sector