India's service sector growth slumps to 6-month low in September

By: Yash Gupte

The depreciation of service sector is alarming as it contributes the maximum to India's GDP

The service sector also known as the tertiary sector which holds the record of contributing the maximum to India's GDP has been witnessing a downward trend in its growth since last few months. Different international and economic intergovernmental organizations have been raising alarms against India's GDP growth and the inflation trends in the country from past few months. Institutions like the World Bank and IMF have cut down India's GDP growth more than 3 times in this financial year.

The seasonally adjusted S&P Global India Services Purchasing Managers Index (PMI) slipped to 54.3 in September from 57.2 in August, registering the weakest rate of expansion since March 2022.

S&P Global compiles the India Services PMI based on responses to questionnaires distributed to a panel of about 400 service-related businesses.

A value above 50 denotes a general increase in service activity, while a reading below 50 denotes a general drop.

But what is the exact reason behind the drop in growth of the service sector which has been the top performing sector and the one contributing the most to the growth of Indian economy?

Let's begin from the inflation in the most developed economies of the World.

Western nations like USA and UK have been facing worst inflationary trends. In order to combat the inflation, these countries have hiked the lending rate and interest rates which are having an adverse effect on the currencies of the world to which rupee is not an exception. The Indian Rupee has been continuously performing poor against the US dollar. In order to keep the inflation and economic situation in control, the RBI has hiked the interest rate by 190 basis points since May 2022.

The World Bank stated in its twice-yearly report on South Asia that "more uncertainty and higher financing costs are anticipated to impede private investment growth." The international finance organisation also stated that the country's exports will be impacted by weakening global demand. Also, the world Bank cut its 2022-23 GDP forecast to 6.5% from an earlier estimate of 7.5%.

As the chart shows, the highest growth in the service sector was noted in the month of June when the PMI Index recorded the growth at 59.2. The PMI Index dropped to 55.5 in July and further to 54.3 in the previous month. The depriciation in the growth of the service sector in India is a result of the high inflation and the negative consumer sentiments.

Though there was a slowdown in the growth of service sector, September marked the 14th straight month of growth in services sector activity as the index remained above the '50' mark.

In an interview to The Economic Times, Pollyanna de Lima, economic associate director at S&P Global Market Intelligence said that, "currency instability poses renewed inflation worries as imported items become more costly, and “undoubtedly” means that the RBI will continue hiking interest rates to protect the rupee and contain price pressures."