Services business contracts sharply in May

New Delhi: Business activity across India's service sector fell drastically during May as the unfavourable economic effects of the coronavirus pandemic impaired business operations, restricted consumer footfall and led demand to collapse, a monthly survey said on Wednesday.

The IHS Markit India Services Business Activity Index stood at 12.6 in May. Although the headline figure rose from April's unprecedented low of 5.4, it remained at a level which, prior to the coronavirus pandemic, was unparalleled in over 14 years of data collection and pointed to an extreme drop in services activity across India, the survey noted.

As per the IHS Markit India Services Purchasing Managers' Index (PMI), a print above 50 means expansion and a score below that denotes contraction.

"Service sector activity in India is still effectively on hold, latest PMI data suggest, as output fell at an extreme rate once again during May," Joe Hayes, Economist at IHS Markit said.

Hayes further noted that "demand for services, both domestically and overseas, continued to plummet in May as clients' businesses remained closed and footfall was drastically below normal levels".

According to the survey, output sank sharply due to extended business shutdowns and very weak demand conditions.

Meanwhile, employment continued to fall in response to weak demand and expectations of further challenging conditions. The Composite PMI Output Index, which measures combined services and manufacturing output, also signalled a further severe contraction in private sector business activity during May.

Standing at 14.8, from 7.2 in April, the latest reading was consistent with a decline in output which was unparalleled prior to the Covid-19 outbreak, the survey said.

Hayes said, "With economic output set to fall enormously in the first half of 2020, it is clear that the recovery to pre-Covid-19 levels of gross domestic product (GDP) is going to be very slow".

India was already in the midst of a protracted economic slowdown before the virus hit due to a festering crisis among shadow lenders and declining consumer demand and private investment. Its GDP grew by 4.2 per cent in 2019-20, the slowest pace in 11 years.

Meanwhile, Moody's Investors Service on Monday downgraded India to the lowest investment grade level and kept it on negative watch, largely because the country faces a prolonged period of slower growth relative to its potential and rising debt levels.

Moody''s Investors Service, S&P Global Ratings and Fitch Ratings are predicting the first contraction in GDP for India in over four decades and a fiscal deficit blowout following COVID-19 disruptions.