India's services sector records strongest growth in 4 months on new orders, easing price pressures

India’s service sector grew substantially in December fueled by fresh business inflows on strong demand and easing inflation, hitting a four-month high, according to a monthly survey.

The HSBC India Services Business Activity Index, which is adjusted seasonally, increased to 59.3 in December from 58.4 in November, reflecting the strongest growth rate in four months.

The HSBC India Services PMI is compiled by S&P Global from responses received to questionnaires sent to a panel of around 400 service sector companies.

In the Purchasing Managers' Index (PMI) language, a print above 50 means expansion and a score below 50 indicates contraction.

The survey noted that the demand grew consistently to drive new business inflows higher. This, in turn, led to improved output and job growth.

"India's services companies expressed strong optimism in December as business activity growth surged to a four-month high. Forward-looking indicators such as new business and future activity suggested that the strong performance will likely continue in the near future," Ines Lam, Economist at HSBC, said.

On the price front, there was a softer increase in cost burdens, though panellists continued to report greater outlays on food, labour and materials. Moreover, selling price inflation also eased in December.

"The easing of input price inflation in the month also supported business sentiment. Strength in the services PMI stands in contrast with the growing signs of a slowdown in the manufacturing industry," Lam noted.

However, the country’s manufacturing sector growth dropped to a 12-month low in December with slower production expansion and softer new business orders rate.

Service providers are hopeful that output will grow over the next 12 months, although the overall level of positive sentiment dipped slightly from November’s six-month peak. Despite the decline, sentiment continues to stay above the long-term average. The rise in new business, positive outlooks and increased capacity pressures contributed to continued job creation within the service sector.

"The rate of employment growth softened from November, but was sharp and among the strongest seen since data collection began in December 2005," the survey said.

Private sector companies in India experienced a quicker rise in output as the year ended. The HSBC India Composite Output Index was at 59.2 in December, up from 58.6 in November, signalling the strongest rise for four months. The Composite PMI Index is a weighted average of manufacturing and services PMI indices, with weights reflecting the size of the manufacturing and service sectors, according to official GDP data.

The surge in new business at service firms more than compensated for a slight slowdown in the goods sector. As a result, total sales growth accelerated, according to the survey.