The growth in India’s services sector just hit a 7-month low on weaker spending

• The cautious sentiment of Indian consumers and businesses drove the growth rate of the country’s services sector activity to its lowest point since September 2018.
  
• A lag in new business activity saw India’s score on the Nikkei India Services Business Activity Index fall to 51 points in April 2019, a decline from 52 points in March.
  
• Indians are keeping purse strings tightened as elections are underway. Aggregate demand and business investment is expected to rebound after elections, when there is greater certainty regarding government policies.
  

The cautious sentiment of Indian consumers and businesses drove the growth rate of the country’s services sector activity to its lowest point since September 2018. This is of particular importance than other metrics, given that the services sector comprises 54% of India’s economy.

A lag in new business activity saw India’s score on the Nikkei India Services Business Activity Index fall to 51 points in April 2019, a decline from 52 points in March.

The reason? Indians are keeping purse strings tightened as elections are underway. Aggregate demand and business investment is expected to rebound after elections, when there is greater certainty regarding government policies.

While a score above 50 indicates an expansion in the services sector, this is the lowest score in seven months. India’s services sector has been expanding for the past 11 months.

In addition to election uncertainty, a shift in consumer preferences towards online bookings caused a slowdown in new business activity, especially since a lot of service providers, like travel agents, act as middlemen between consumers and businesses. Businesses also reported a high degree of deferred client payments.

The report, which was compiled by IHS Markit, indicated that while the private sector economy was undergoing a period of weakness, there was an optimistic outlook for the second half of the year.

Once elections conclude, businesses in the services sector are expected to boost job creation by hiring more people. This will also be aided by an upward trend in new export business.

Commenting on the results, Pollyanna De Lima, Principal Economist at IHS Markit, said that the RBI might cut rates again in June to boost economic activity. “Another key takeaway from the latest results is the lack of inflationary pressures in both the manufacturing and service sectors, which coupled with slower economy growth offers room for a further cut to the benchmark repurchase rate.”


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