Services sector activity, which makes up more than half of India’s gross domestic product (GDP), weathered a second month of brutal contraction in May as the stringent coronavirus lockdown brought the economy to a near halt and left millions of people jobless.
Still, activity picked up a shade in May with the services Purchasing Manager’s Index (PMI) reading at 12.6, slightly better than the record 5.4 low reported in April, but still well below the 50-mark that separates contraction from expansion, according to data released by IHS Markit.
“Given the stringency of the lockdown measures imposed in India, it is no surprise to see the severity of the declines in April and May. With economic output set to fall enormously in the first half of 2020, it is clear that the recovery to pre-covid 19 levels of GDP is going to be very slow,” Joe Hayes, an economist at IHS Markit, said, adding services sector activity is still effectively on hold.
The reopening of India’s economy after a more than two-month lockdown to contain the virus is likely to improve the situation in the coming months but the severity of contraction in manufacturing and services sectors indicates that India is set to slip into a deep recession this year.
Data released on Monday showed manufacturing PMI shrank sharply at 30.8 in May, though slightly better than the 27.4 recorded in April, forcing enterprises to slash headcount at the quickest pace in over 15 years.
“Spare capacity continued to rise, albeit to a far lesser degree than in May as prolonged shutdowns led to a rise in incomplete work at some firms. Meanwhile, employment continued to fall in response to weak demand and expectations of further challenging conditions,” IHS Markit said.
New business from overseas markets collapsed at an unprecedented scale once again in May, with around 95% of surveyed companies reporting a fall in foreign demand when compared to April, the data analytics firm said.
“In response to absent demand pressures and low business requirements, employment at service sector firms was reduced in the latest survey period. The rate of job shedding remained strong by historical comparisons, despite easing since April,” it added.
Lower staffing levels also coincided with a further deterioration in business sentiment. “Output expectations for the coming 12 months slumped to their most negative since records began in December 2005 amid forecasts of prolonged economic weakness domestically and overseas,” it said.
Prithviraj Srinivas, an economist at Axis Capital Ltd, said he expected a stronger services PMI number since several indicators like Google Mobility, traffic congestion and electricity data were indicating improvement, which should have technically translated into stronger PMI numbers.
“We suspect most sales are happening at nearest convenience stores in addition to organized retail and, hence, the delta improvement may not be getting captured in services PMI. June PMIs should show much larger gain,” he added.
Though the government has eased the lockdown, flight of migrant workers, restrictions on inter-state movements and downbeat consumer sentiment are expected to drag down the country’s economy.