Fall in Service Purchasing Managers’ Index

• 04 Jul 2020

Why in News

The IHS Markit India Services Business Activity Index (i.e Service Purchasing Managers’ Index (PMI)) has observed the contraction of services sector activity for the fourth consecutive month in June 2020.

• India’s services sector activity remained in deep downturn in June as the Covid-19 pandemic curtailed intakes of new work orders and disrupted business operations.
• The Index is compiled by IHS Markit for more than 40 economies worldwide. IHS Markit is a global leader in information, analytics and solutions for the major industries and markets that drive economies worldwide.

Purchasing Managers' Index

• PMI is an index of the prevailing direction of economic trends in the manufacturing and service sectors.
• It consists of a diffusion index that summarizes whether market conditions, as viewed by purchasing managers, are expanding, staying the same, or contracting.
• The purpose of the PMI is to provide information about current and future business conditions to company decision makers, analysts, and investors.
• It is different from the Index of Industrial Production (IIP), which also gauges the level of activity in the economy.
  
  • IIP covers the broader industrial sector compared to PMI.
  • PMI is more dynamic compared to a standard industrial production index.

Key Points

• Current Scenario of Service Sector:
  
  • The IHS Markit Services PMI in June rose to 33.7 from 12.6 in May (2020), indicating a pick-up from the previous month, although any reading below 50 on this survey-based index shows contraction.
    
    • The index stood at a record low of 5.4 in April (2020).
  • India's services sector activity reported the slower rate of decline which is reflective of some stabilisation in activity levels.
    
    • However, the closures and temporary suspensions are responsible for the stabilization in service activities.
  • Additionally, 59% of firms reported no change in output since May. Meanwhile, only 4% registered growth, while 37% recorded a reduction.
• Reasons :
  
  • Sharp fall in total new orders due to reduced consumption habits.
  • Closure of businesses due to the unfavourable environment.
  • Steep drop in export sales.
  • Job losses due to lower business requirements.
  • Poor staff availability.
• Significance of Service Sector:
  
  • The performance of the service sector is critical to measure the economic situation of the country as it accounts for the two-thirds of total foreign direct investment inflows into India and about 38% of India's exports.
  • The Service Sector has a share of 57% in Gross Domestic Products (GDP), which is maximum among all three sectors — services, industry and agriculture.
• Composite PMI Output Index:
  
  • The Composite PMI Output Index, which measures combined services and manufacturing output, rose to 37.8 in June, up from 14.8 in May.
    
    • But 37.8 is still below the crucial 50 level signifying contraction.
  • The PMI for manufacturing has also been released which is at 42.7 signifying moderate fall in manufacturing production.

Way Forward

• Although the deterioration was weaker than in April and May, owing to a stabilisation in output levels at some firms, the latest reduction was stronger than seen prior to the virus outbreak by a wide margin.
• Thus, business confidence needs to be developed to uplift expectations of service sector activities which will help to manage the risk of a protracted recession noted by the firms.

Source:IE