India's services sector recorded its fastest growth in five months in August 2024, signalling robust business activity and strong domestic demand, according to the latest report from the HSBC India Services Purchasing Managers' Index (PMI) compiled by S&P Global. The index rose to 60.9 in August, up from 60.3 in July, surpassing expectations and the preliminary estimate of 60.4. This latest reading is the highest since March 2024 and reflects sustained momentum in the sector, which has been in continuous expansion since August 2021, remaining above the 50-mark, which separates growth from contraction.

Strong Domestic Demand Drives Growth

The services sector in India has shown impressive resilience, largely driven by a surge in new orders, particularly from the domestic market. Ms. Pranjul Bhandari, Chief India Economist at HSBC, emphasized that domestic demand was the primary driver behind this growth. "This growth was largely driven by an increase in new orders, especially domestic orders," Bhandari stated, pointing to the solid foundation provided by India's growing internal market. Despite this, there was a slight moderation in the pace of hiring compared to July, indicating a more cautious approach to expansion in workforce levels.

The new business sub-index, a crucial indicator of demand, reached a 4-month high in August, showing a slight uptick from July and remaining well above its historical average. This surge in new orders underlines the strength of India’s services sector, which is a critical component of the country’s overall economic performance.

However, the international picture is somewhat more mixed. While international demand for India's services remained strong, the pace of growth slowed to a 6-month low in August. This reflects softer global economic conditions, particularly in key export markets, as geopolitical and economic uncertainties continue to weigh on global demand for services.

Easing Inflationary Pressures Bring Relief

One of the key factors contributing to the strong performance of India's services sector in August was the easing of inflationary pressures. Cost pressures in the sector rose only moderately during the month, driven by increases in food, labour, and transportation costs. However, the rate of input cost inflation slowed to a 4-year low, offering much-needed relief to service providers, who have been grappling with high input costs in recent months.

"On a positive note, input costs rose at their slowest pace in six months, with both the manufacturing and services sectors following the same pattern," noted Ms. Bhandari. The reduction in input cost inflation has allowed businesses to ease output price inflation, providing a much-needed breather for consumers and maintaining the competitiveness of India’s service exports.

The report also highlighted that while cost pressures remained elevated, they were far lower than earlier this year. This has been a major factor in the positive business sentiment observed in the sector, although overall business confidence did fall to its lowest level in over a year. Service providers remain optimistic about future growth, but concerns about global economic conditions and rising costs have tempered some of the optimism.

Sectoral Outlook: Services vs. Manufacturing

The services sector’s robust performance in August contrasts with a slight dip in India’s manufacturing sector, which saw its PMI fall to a 3-month low of 57.5. This difference highlights the contrasting dynamics in India's economy, where the services sector is being propelled by strong domestic demand, while the manufacturing sector is facing more challenges, particularly in the face of global economic uncertainties and supply chain disruptions.

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Despite the dip in manufacturing, the combined performance of both sectors continues to paint a picture of resilience and growth for the Indian economy. The services sector, in particular, continues to be a key driver of economic growth, contributing significantly to the country’s GDP and employment levels.

Positive Momentum Ahead for India's Economy

Looking ahead, the outlook for India’s services sector remains largely positive, though global headwinds and concerns over inflationary pressures may still pose challenges. While international demand has slowed, the strong domestic market is expected to continue providing a solid foundation for growth. The easing of inflationary pressures will also help sustain momentum, as businesses face fewer cost-related hurdles and are better positioned to expand operations.

For businesses operating in India’s services sector, the key takeaway from the latest PMI data is that while growth continues to be strong, there is a need to stay vigilant about external risks and inflationary trends. The sector's expansion streak, which has continued since August 2021, shows no signs of slowing down in the immediate future, especially with domestic demand remaining resilient.

The services sector plays a crucial role in India’s broader economic landscape, and its continued growth is a positive indicator of the country’s overall economic health. As India navigates the challenges of the global economy, the services sector will remain a key pillar of growth and employment, providing opportunities for millions of people across the country.

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