GST blues hit services sector, falls to 4-year low

New Delhi: The services sector activity contracted at the sharpest rate in nearly four years in July as lack of knowledge regarding the new indirect tax Goods and Services hit fresh orders. 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. “Output and new work declined for the first time since January, with rates of reduction the quickest since September 2013,”  said the survey. It said that this had an adverse effect on the labour market, with employment contracting over the month. “Business conditions in India’s service economy deteriorated markedly in July following the implementation of GST,” said the survey. 

It said firms expressed a lack of knowledge regarding the GST and expect more clarity in the near-term to lead to activity growth. “The launch of the GST was mentioned by services firms as having caused a contraction in new work, leading to lower activity,” it said. However, confidence for the year ahead was, in fact, the strongest since August 2016.  The data follows a similar downtrend seen in the manufacturing sector, which also contracted in July following the implementation of GST resulting into significant drop in new orders and output.

“PMI data for July highlight a reversal in fortunes across India, with the economy going into reverse mode after seeing a pick-up in growth momentum during June. The downturn in services follows similar weakness in manufacturing, to make a double-whammy of disappointing news at the start of the second quarter of the 2017/2018 financial 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,” said Pollyanna De Lima, principal economist at IHS Markit, and author of the report. 

She said that 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.