In a blow to the narrative of a growing services and consumption led economy, India’s services sector contracted in the month of June as weak sales, competition and taxation burden hampered output, a monthly survey conducted by IHS Markit, showed on Wednesday.
The IHS Markit India Services Business Activity Index fell to 49.6 in June, down from 50.2 in May, signalling a contraction as a score below 50 signals shrinkage of the sector while a score above the 50 mark indicates expansion. The agency said that stagnant sales caused a drop in business activity for the first time in over a year.
"The latest PMI results for India bring some concerns over the sustainability of the relatively robust growth rates seen at the start of the year, and the ability of companies to create jobs," said Pollyanna de Lima, Principal Economist at IHS Markit.
Lima noted that companies linked the fall in output to the lack of demand due to higher taxation in the GST regime.
"It's somewhat surprising to see some companies linking subdued demand to high tax rates, two years on from the GST implementation, with the hotel tax mentioned in particular," she said.
This comes along with a fall in the IHS Markit India Composite PMI output index which maps both the manufacturing and services industry. This index fell from 51.7 in May to 50.8 in June -- its lowest mark in a year.
"Looking at the opening quarter of fiscal year 2019/20, we see the slowest upturn in private sector output since the last quarter of the fiscal year 2017/18, which dragged employment growth down to a notable extent," Lima said.
However, there’s still hope. Indian service providers expect demand to firm up in the coming months through an expected stimulus from the government.
"Services companies are hoping that some stimulus will boost demand in the coming months, translating into output growth, though confidence about the future also started to fade," Lima said.
There is speculation that the Reserve Bank of India will likely continue with its dovish stance and continue to cut rates to help economic growth in the country as inflation is largely under control.
For the third time this year, RBI had cut key lending rates by 25 basis points in its June monetary policy review to spur economic growth.