India's services sector is still booming, but signs of weakness are visible

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Sluggish growth in developed markets could weigh on demand for IT services exports. Photo: Hemant Mishra/Mint

Summary

Business activity in India's services sector softened in April but remained near its highest level in just under 14 years. However, some signs of weakness are emerging amid concerns that interest rates will stay higher for longer.

Business activity in India's services sector, a crucial driver of the country's gross domestic product (GDP) growth, softened in April but remained near its highest level in just under 14 years. The seasonally adjusted HSBC India Services Business Activity Index fell to 60.8 in April from 61.2 in March. A reading above 50 indicates expansion.

However, some signs of weakness are emerging. For instance, the PMI sub-index for new exports dropped in April, making a weak start to FY25 amid concerns that interest rates staying higher for longer could hamper India's services-sector growth. Sluggish growth in developed markets could weigh on demand for IT services exports.

Also read: Business activity grew at fastest pace in 14 years in April, HSBC survey shows

According to Emkay Global Financial Services, healthy services exports, including IT services and business consulting & financial services, have largely offset the goods deficit in FY24. However, while growth in non-IT services exports could spill into FY25 as well, IT services exports growth could moderate to the low-single digits. That, along with lower remittances and slower goods exports amid weaker-than-expected global demand, may hurt.

The moderation in demand has also meant that Indian services providers are starting to lose their pricing power, which was earlier on a solid footing. The rate of selling-price inflation eased in April from a nearly seven-year high of 54.3 in March. Service providers have been seeing higher input costs (particularly for fruits and vegetables) and labour costs, and their operating expenses continued to increase in April. Their margins were squeezed as they could pass on only a part of the increased costs to customers.

Going forward, the impact on input costs of elevated crude oil prices and potential changes in supply chains owing to geopolitical tensions should be monitored. On the macro front, sticky inflation could further delay interest-rate cuts.

But for now, confidence among Indian service providers about business activity in the year ahead rose to a three-month high in April. Marketing efforts and efficiency gains, plans for competitive pricing, and predictions that demand conditions will remain favourable boosted optimism, said the PMI survey report.

But things may not be as hunky-dory as they seem. "The PMI indicator shows growth conditions remain on the stronger side in both manufacturing and service sectors," said Gaura Sen Gupta, economist at IDFC First Bank. "That said, India's GDP growth is expected to moderate to 6.5% FY25 from around 8% likely in FY24, with a slowdown in companies' profit growth as input cost pressures rise," she added.

Also read: India's manufacturing activity in April second strongest in 3.5 years

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