Services activity eases marginally in July on mounting cost pressures

India’s services activity eased marginally in July when compared with the previous month on a slowing expansion of new business and mounting cost pressures, a private survey showed this week.

The HSBC India Services Business Activity Index declined marginally to 60.3 in July from 60.5 in the prior month.

Business expenses surged due to higher wages and rising material costs, with inflation accelerating since June. Higher input costs and strong demand caused the largest increase in service prices in seven years, the survey showed.

“Robust demand conditions, reflected by increased new orders from both domestic and international markets, led firms to increase hiring levels. On the price front, higher wages and material costs led to a further increase in input costs. Consequently, output prices rose at the fastest pace in over 11 years” Pranjul Bhandari, chief India economist at HSBC, said.

“Service sector activity rose at a slightly slower pace in July, with new business increasing further, primarily driven by domestic demand. Looking ahead, services firms remained optimistic about the outlook for year ahead,” Bhandari said.

Total new orders expanded at a historically sharp pace. New export orders increased at the third-strongest pace since the series’ inception in September 2014 amid strengthening demand for Indian services worldwide. Panelists mentioned Austria, Brazil, China, Japan, Singapore, the Netherlands, and the US as sources of rising export orders.

The rise in output reflected a sustained increase in sales volumes in July, with survey participants particularly commenting on buoyant demand, tech investment, and a growing online presence.

In July, companies increased their selling prices due to rising costs and stronger pipelines for newer businesses. This caused the highest rate of price inflation in seven years.

Businesses said the cost increases were mostly from higher spending on labor and materials like eggs, meat, and vegetables. The overall cost inflation was solid and quicker than in June but still below the long-term average

Services firms went ahead with their full- and part-time staff recruitment driven by favorable economic conditions and optimistic demand expectations. The latest rise in employment levels was among the strongest in nearly two years. Despite increased hiring and rising demand, backlog volumes rose further in July.

Around 30% of the survey panel forecast greater output volumes in the next 12 months, while only 2% expect a decline. The overall level of sentiment rose since June and was aligned with its long-run average.