Services sector contracts by most in 4 years on GST woes: PMI

New Delhi: Services sector plunged into contraction mode in July with the sharpest fall in about four years as confusion caused by the GST rollout triggered a dip in new business orders, a monthly survey showed on Thursday.

The data follows a similar downtrend seen in the manufacturing sector, which also contracted in July following the implementation of Goods and Services Tax (GST) resulting into significant drop in new orders and output.

The Nikkei India Services Purchasing Managers' Index (PMI), a measure of services sector output on a monthly basis, plunged to 45.9 in July, the lowest since September 2013, from June's eight-month high of 53.1.

A reading above 50 indicates expansion, while a score below this mark means contraction. This is the first time in six months that the services index has slipped into contraction territory. The July services PMI also signalled the first downturn in output since the start of this year.

"PMI data for July highlight a reversal in fortunes across India, with the economy going into the reverse mode after seeing a pick-up in growth momentum during June," said Pollyanna De Lima, Principal Economist at IHS Markit, and author of the monthly report.

The launch of GST was cited by services firms covered in the survey as having caused contraction in new work orders, leading to lower activity. The seasonally adjusted Nikkei India Composite PMI Output Index -- which maps both manufacturing and services -- fell sharply in July to 46.0 -- the lowest since March 2009.

The index read 52.7 in June this year. "Private sector activity dipped for the first time since the demonetisation shock and to the greatest extent since early 2009, mirroring the sales trend," Lima added. Indian service providers, however, remain optimistic about the 12-month outlook.

"Whereas many will question how deep an impact the GST will have on the economy in the near and long term, firms seem convinced that prospects will brighten as the new tax regime becomes clearer," Lima said.

The PMI data for manufacturing and services sector will also bolster calls for further rate cuts by the Reserve Bank, which yesterday lowered its key lending rate by 0.25 per cent, a move which is likely to translate into lower interest rates for home, auto and other loans as also boost economic activity.

Commenting on the PMI data, global financial services major Nomura said the decline in the services index was entirely due to the GST introduction. Noting that the the services firms expressed "a lack of knowledge regarding the GST and expect more clarity in the near term to lead to activity growth", Nomura said the drop in activity in July is expected to be transitory.

On the price front, the input price index eased marginally to 51.7 in July from 52.3 in June, but the output price index rose sharply to the highest since early-2013 to 54.6 from 51, as firms cited a higher tax burden on account of the GST.

"This is in contrast to the manufacturing sector, where firms offered discounts to capture greater market share. This divergence reflects the fact that post GST, in general, tax rates are higher for the services sector and lower for the manufacturing sector," Nomura said.

The transition to GST has resulted in the second dip in activity levels after the demonetisation shock, but the increase in the future activity index both in manufacturing and services suggests that firms see this as transitory, it added.

"We expect activity levels to normalise after August and the PMIs to also rebound sharply. Today's data also suggests some upside risk to services inflation in the coming months due to the higher tax burden," Nomura said.