Services sector growth jumps to three-month high in December
India's services sector experienced a notable recovery in December 2023, as the services Purchasing Managers' Index (PMI) reached a three-month high of 59.0, up from November's one-year low of 56.9. This marks the 29th consecutive month of expansion, staying above the crucial 50-mark that separates growth from contraction. The composite PMI also climbed to a three-month high of 58.5 in December even though the manufacturing PMI declined to an 18-month low of 54.9.
New orders drive services sector growth
The increase in business activity was fueled by a surge in new orders, according to Pranjul Bhandari, Chief India Economist at HSBC. Both domestic and international clients contributed to this growth, with service providers reporting higher demand from Australia, Canada, Europe, the Middle East, and South America in December. However, the rate of increase in overseas orders was the lowest in six months. S&P Global emphasized that Indian services firms expect strong demand momentum to continue into 2024.
Employment and business optimism improve
As new orders grew, service firms faced mild capacity pressures in December. Employment in the sector increased slightly faster than in November, with job creation extending into its nineteenth consecutive month. New workers were hired on both full- and part-time bases. The overall degree of business optimism also improved, as services firms expect strong demand momentum to continue into 2024. S&P Global attributes this positive outlook to advertising efforts and better customer relationships.
Input cost inflation at 40-month low, output prices rise
In December, input cost inflation for service providers dropped to its lowest level in 40 months. However, output prices rose at a faster pace, indicating improved corporate margins. S&P Global noted that "the rate of increase in prices charged for the provision of services in India was solid, above its long-run average and faster than that seen for input costs." Bhandari added that input costs increased at slower pace than in November, continuing the softening trend that began in mid-2023.
December CPI inflation forecasted at 6.03%
Economists widely expect headline retail inflation to have risen further in December from 5.55% in November, testing the upper-bound of the Reserve Bank of India's (RBI) 2-6% tolerance range. "We are forecasting India's December CPI inflation at 6.03%," said Kaushik Das, Deutsche Bank's Chief Economist for India and South Asia. He explained that the uptick is primarily due to an unfavorable base effect and expects CPI inflation to moderate to an average of 5.0% in January-March 2024.
