The Goods and Services Tax pulled India’s services sector down for the second month in a row, an independent survey released on Tuesday revealed. According to the Nikkei India study, the Purchasing Managers’ Index of the services sector contracted in August as business activity and new work orders were affected by the new tax regime.
Although the PMI improved slightly from 45.9 registered in July to 47.5 in August, it still points to a second successive decline in output. The figure had dropped to a four-year low in July from an eight-month high of 53.1 in June, its lowest since September 2013.
The PMI is an indicator of market health. A measure above 50 on the index indicates growth, whereas one below the halfway mark denotes contraction.
“Services acted as a drag on the private sector economy in August, with the reduction in business activity offsetting growth of manufacturing production,” said Pollyanna De Lima, principal economist at the IHS Markit and author of the Nikkei report released on Tuesday. “The underlying trend for services is one of uncertainty. Businesses are holding back on investment, leading to falls in employment. At the same time, input costs are increasing and firms are unable to fully pass these on due to competitive pressures.”
Even though the downturn was not as severe than in July, jobs were shed because of fewer workloads, and backlogs were accumulated.
Manufacturing sector picking up pace
The country’s manufacturing sector, meanwhile, was back in the growth zone in August as new business orders surged after the GST-related contraction in July. But this growth was insufficient to offset the contraction in services activity.
On the prices front, there was “muted inflationary pressures” in the services sector. Companies said they paid more for beverages, food, fuel and paper and passing on to consumers only part of the additional cost burden, the report added.
The confusion caused by the GST rollout had triggered a dip in new business orders and caused the services sector to contract in July. In August, respondents to the survey said they anticipated the new taxation system and advertising campaigns to support growth, but were still worried about competitive pressures.
However, the economist stressed that it was “not all doom and gloom” as “business activity, new business and employment showed much slower rates of reduction than recorded in the July survey”.