Services sector activity shrinks in November as GST weakens demand

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Services sector activity shrinks in November as GST weakens demand

Services sector activity in the country plummeted sharply during November on the back of rising prices driven up by the recently implemented Goods and Service Tax (GST). GST led to weak demand and resulted in lower customer turnout in the services industry, a monthly survey said on Tuesday.

Services sector activity in the country plummeted sharply during November on the back of rising prices driven up by the recently implemented Goods and Service Tax (GST). GST led to weak demand and resulted in lower customer turnout in the services industry, a monthly survey said on Tuesday.

India's services sector plunged into contraction for the first time in three months. November's Nikkei/IHS Markit Services Purchasing Managers' Index fell to 48.5 - its lowest since August - from 51.7 in October, well below the 50 mark that separates expansion from contraction.

In PMI lexicon, a print above 50 means expansion and a score below that denotes contraction.

"Business under performance emanated from July's Goods and Services Tax (GST) which contributed to sluggish demand and lower customer turnout, according to anecdotal evidence," said Aashna Dodhia Economist at IHS Markit and author of the report.

Despite unfavourable demand conditions, service providers continued to add to their workforce numbers as the level of business sentiment in the service sector for the next 12-months rose at the strongest pace since July.

The latest services PMI follows the manufacturing one announced December 1, which showed that robust growth in manufacturing sector during November.

Accordingly, the Nikkei Composite Output Index, that maps both the manufacturing and services activity fell from 51.3 in October to a three-month low of 50.3 in November, signalling a broad stagnation in private sector output in India.

On the prices front, input cost inflation quickened to the fastest since October 2013 and accordingly service providers increased their average selling prices in November.

"That said, cost pressures further intensified at service firms (fastest inflation since October 2013), which could constrain output growth in the near term and reduce any central bank appetite to reduce interest rates," Dodhia said.

India Inc, however, is demanding interest rate cut to further build on positive sentiment generated by the rebound and upgrade of the country's sovereign rating by Moody's.

In its October review, it had kept the benchmark interest rate unchanged on fears of rising inflation while lowering growth forecast to 6.7 per cent for the current fiscal.

The central bank had reduced the benchmark lending rate by 0.25 percentage points to 6 per cent in August, bringing it to a 6-year low.

with PTI inputs