S&P Global India: Services up, now for the returns – The Economic Times

Clipped from: https://economictimes.indiatimes.com/opinion/et-editorial/services-up-now-for-the-returns/articleshow/92708660.cms

Synopsis

The Reserve Bank of India (RBI), which has raised the repo rate to tame inflation, anticipates higher pass-through of input cost to selling prices. A slew of steps taken by GoI has helped ease cost-push pressures somewhat. Excise duty cuts on petrol and diesel have moderated pump prices.

First, the good news. The S&P Global India Services Purchasing Managers’ Index (PMI) has risen to 59.2 in June from 58.9 in May, driven by a surge in business orders and output as demand picked up. The expansion, the highest since 2011, augurs well for growth as the services sector accounts for nearly 54% of economic output.

Now, the caveat. The outlook on recovery could get clouded due to geopolitical tensions that are likely to accentuate supply chain disruptions and shortages of key intermediates. The June imprint showed that firms were able to secure new orders despite charging more for their services. Prices charged rose at the fastest pace since July 2017, and yet orders remained robust.

But firms are now worried about price pressures. This is reflected in the restricted business confidence, even as firms expect services activity to be sustained over the next 12 months. Rising input costs are also a big concern in the manufacturing sector. PMI in manufacturing slowed to 53.9 in June against 54.6 in May.

The Reserve Bank of India (RBI), which has raised the repo rate to tame inflation, anticipates higher pass-through of input cost to selling prices. A slew of steps taken by GoI has helped ease cost-push pressures somewhat. Excise duty cuts on petrol and diesel have moderated pump prices.

Thankfully, contact-intensive services such as hospitality and tourism are gaining traction. This will help boost services export. e-Way bill generation is up due to the sustained momentum in trade and transport activity. The aviation industry is out of the woods. Perceptions apart, a clear picture on the revenue and profitability of firms – including IT – will be available when companies from diverse sectors declare their earnings for the first quarter.

An increase in capacity utilisation and pick-up in bank credit will strengthen investment activity. GoI must push capital expenditure to boost demand and revive India Inc‘s animal spirits. Greater coordination between GoI and RBI holds the key to taming inflation without sacrificing too much growth.

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