MUMBAI: With the lockdown having relaxed considerably in most parts of India barring its big cities, economic activity is slowly crawling back.

One sign of this is the uptick in purchasing manager’s indices (PMI) for services and manufacturing for May.

The headline services PMI number came in at 12.6 for May, up from the historic low of 5.4 touched in April. A reading below 50 denotes contraction while that above shows expansion in activity.

This bounce was expected as lockdown restrictions were eased during the second and third phase. Small shops and even malls have now been allowed to open for business, provided they are designated as containment zones. In fact from June, excluding big cities, business in most regions are expected to restart operations. Hence, PMI is likely to show sharp improvements in the coming months as well.

But before we get our hopes up, there are some sombre signs in the services PMI.

Sentiment hasn’t perked up at all. “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,” said IHS Markit in its release.

In other words, companies are not hopeful of a recovery yet. This pessimism may dim employment prospects as well. While the latest data from private think tank Centre for Monitoring India’s economy (CMIE) showed that India added more jobs in May than in April, the unemployment rate continues to be high at 23.48%.

Add the fact that the services sector is labour intensive and also requires more social interactions than manufacturing. What’s more is that both the ambit and demand for services is far wider and stronger in cities than other areas. Since most big cities are still under strict lockdown, the services segment is unlikely to show a quick revival.

“While we anticipate that June will see better performance on account of the calibrated reopening and a return to normal for several parts of the country, underlying weakness is likely to persist for some time,” Rahul Bajoria, senior economist with Barclays Bank Plc wrote in a note.

Economists are expecting the economy to contract anywhere between 4.55 and 7.0% in the current fiscal. Most economists believe that without fiscal support, even a modest recovery expected in the second half would become a challenge.

“There will be a need for government to step in again with demand stimulus because you cannot expect the private sector to get up and start running again,” said Sonal Varma, economist at Nomura Financial Advisory and Securities (India) Pvt in a webinar on Tuesday.

Varma has forecast a contraction of 5.2% in FY21, with at least two quarters of deep contraction.

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