Image used for representational purpose only.
| Photo Credit: The Hindu

India’s dominant services sector expanded at its fastest pace in 13 years last month as demand increased significantly despite elevated inflationary pressures, a business survey showed on Thursday (August 3).

S&P Global’s India services purchasing managers’ index rose to 62.3 in July from June’s 58.5, confounding expectations in a Reuters poll for a dip to 58.0. It was the highest index reading since June 2010 and has remained above the 50-mark that separates growth from expansion for two years.

“The resilience of the service sector underscores its vital role in fuelling India’s economy, with the PMI results for July so far pointing to a notable contribution from the sector to overall GDP for the second fiscal quarter,” noted Pollyanna De Lima, economics associate director at S&P Global Market Intelligence.

India’s economy is expected to grow 6.2% in the July-September quarter, according to the latest Reuters survey.

Overall demand remained strong. While the new business sub-index showed demand had risen since August 2021, the pace of growth was the highest since June 2010.

International demand also gathered steam, rising significantly in July and was the second-strongest since the series started in September 2014.

Inflation in India rose to 4.81% in June, due to surging vegetables prices. Though within the Reserve Bank of India’s (RBI) 2%-6% target range, the central bank was not expected to cut rates anytime soon.

Operating costs rose at the fastest pace since June 2022 and firms passed on some of that burden to customers, albeit at the slowest pace in three months as they were cautious about their pricing strategies.

“Looking at PMI price indices in recent months, it seems that competitive advantage continued to support demand for Indian services, with increases in output prices here modest relative to several other nations,” added Ms. De Lima.

Although the future activity sub-index, which measures optimism, slipped from June’s six-month high over concerns surrounding extreme weather, the year-ahead outlook remained strong.

Firms continued to add headcount, stretching the current sequence of hiring to more than a year. However, little-changed from June the rate of hiring remained weak.

A manufacturing sector PMI released on Monday dipped to 57.7 in July but strong services activity meant the overall S&P Global India Composite PMI Output Index rose to a 13-year high of 61.9.

The decline in the inflation rate in June is primarily due to a fall in prices of mineral oils, food products
| Photo Credit: Reuters

India’s wholesale prices remained in deflationary territory for the third successive month in June, with the pace of price contraction from a year ago quickening to -4.12% from -3.48% in May.

This is the sharpest contraction in wholesale prices in about eight years, and was largely aided by the base effects from last June when wholesale price inflation was 16.2%, and some deceleration in commodity prices.

Some food items such as milk, cereals, pulses and wheat, reported high inflation rates in the range of 8%-9%. Vegetables reported 22% deflation year-on-year, but prices were up 13.2% in June, when compared to May.

While fuel and power inflation rate skidded to -12.6% in June from -9.2% in May, the dip in prices in other categories was milder, with the Food Index down just 1.2% compared to -1.6% in May. Sequentially, however, wholesale food prices were up 1.4% from May.

Deflation in primary articles’ prices moved to -2.9% from -1.8% in May, but their prices inched up 0.6% from May. Manufactured products’ prices fell 2.7% from last June and 0.5% from May 2023 levels.

The Commerce and Industry Ministry said the decline in the inflation rate in June is primarily due to a fall in prices of mineral oils, food products, basic metals, crude petroleum & natural gas and textiles. The ministry also revised upward the inflation rate for April 2023 to -0.79% from -0.90% estimated earlier.

Rating firm ICRA reckoned that the deflation in the WPI will ease to 2%-2.5% in July with global commodity prices seeing a sequential rise of 1.2% so far this month. The surge in prices of vegetables, with a “moderate hardening in cereals and pulses” due to supply disruptions amid excess rainfall, along with the lag in sowing of major crops and the onset of El Nino conditions impart uncertainty to the food inflation outlook, it noted.

“The moderation in food inflation in year-on-year terms masks the sequential price rise: The month-on-month increase in food prices was similar to that seen in retail inflation data for June,” said a research note by Barclays’ analysts, which said food prices surged across the board in June, except in the case of fruits and oilseeds.

The gap between retail inflation, which hit a three-month high of 4.8% in June, and wholesale inflation has now widened to 893 basis points, the highest since June 2022, and economists expect the deflation in wholesale prices to help moderate retail prices with a lag.

One basis point equals 0.01%.