India’s Services Sector Expands to 59 in February, Driven by Strong Global Demand

Services Sector Rebounds as Manufacturing Slows to a 14-Month Low

India’s services sector saw a robust expansion in February, with the Services Purchasing Managers’ Index (PMI) rising to 59, up from a 26-month low of 56.5 in January, according to a private sector survey released on March 5. The improvement was largely driven by surging global demand, which grew at its fastest pace in six months.

However, this strong performance in services contrasted sharply with the manufacturing sector, where the HSBC India Manufacturing PMI fell to a 14-month low of 56.3, indicating a slowdown in industrial activity.

Global Demand Drives Services Growth

According to Pranjul Bhandari, chief India economist at HSBC, the services sector benefited from strong global demand, which fueled output growth. The new export business index indicated that international orders increased at their fastest pace in six months, highlighting the sector’s resilience and growing appeal to foreign clients.

“Global demand, which grew at its fastest pace in six months according to the new export business index, played a major role in driving output growth for India’s services sector,” Bhandari noted.

India’s service exports have outperformed goods exports over the past year, a trend supported by increasing demand from Africa, Asia, Europe, the Americas, and the Middle East.

Employment Sees Strongest Growth Since 2005

The services sector boom also translated into job creation, with employment growth reaching one of its highest rates since 2005. Service providers expanded their workforce to meet rising demand, reinforcing the sector’s role as a key driver of employment in India.

HSBC’s report highlighted that the transportation, information, and communication industries witnessed some of the strongest hiring activity, reflecting increased business confidence and sustained economic momentum.

Inflationary Pressures in Consumer Services

Despite the positive outlook, inflationary pressures remained a concern in the services sector. Consumer services faced the highest cost pressures, with firms in the Transport, Information, and Communication industries reporting the strongest increase in selling prices.

“Out of the four broad areas of the service economy tracked by the PMI survey, cost pressures were most intense in the Consumer Services category. The strongest increase in selling charges was signaled by Transport, Information & Communication firms,” HSBC stated.

This suggests that companies in these sectors were able to pass on rising costs to consumers, potentially impacting affordability and overall demand in the long run.

Economic Growth Supported by Services

The services sector’s strong performance played a crucial role in India’s economic recovery, as indicated by the recent GDP data.

In the third quarter of FY24, GDP growth rebounded to 6.2%, recovering from a near two-year low of 5.6%. Analysts attribute this recovery largely to the services sector, which has continued to outperform other segments of the economy.

Looking ahead, India’s services sector is projected to expand by 7.3% in FY25, slightly lower than the 9% growth recorded in the previous year. While the pace of expansion may moderate, continued strength in global demand, employment growth, and robust domestic consumption are expected to sustain momentum.

Outlook: Services Growth to Outpace Manufacturing in 2024

The contrast between the services and manufacturing sectors indicates a shifting economic landscape. While manufacturing has been impacted by global economic uncertainties and supply chain constraints, the services sector has capitalized on strong export demand and rising domestic consumption.

If current trends continue, services will remain India’s primary growth engine in 2024, while manufacturing may need policy support and investment incentives to regain momentum.

Highlights:

• India’s Services PMI surged to 59 in February, up from 56.5 in January.
• Global demand fueled the strongest export growth in six months.
• Services sector job creation hit one of its highest levels since 2005.
• Consumer services experienced the highest cost pressures, pushing prices up.
• GDP growth rebounded to 6.2% in Q3 FY24, largely driven by services.
• Services sector expected to grow by 7.3% in FY25, slightly below FY24’s 9% growth.

With global and domestic demand continuing to favor the services industry, policymakers and businesses must ensure that inflationary pressures are managed to maintain long-term growth and stability in India’s economic expansion.