India’s services sector activity surged to a three-month high in May 2025, fueled by robust export growth and record-breaking employment expansion, as shown in the latest data from the HSBC India Services PMI. The Business Activity Index, compiled by S&P Global, climbed to 58.8 in May, up marginally from 58.7 in April and 58.5 in March. This continued rise keeps the index well above the 50-mark, which separates expansion from contraction, signaling strong economic momentum in one of the country’s most critical sectors.

The services industry, which forms over 50% of India’s GDP, plays a pivotal role in shaping the country’s economic trajectory. According to the report, export orders grew sharply in May, contributing to the sustained expansion of overall services output. The performance was not just limited to output but was also evident in the labour market, where employment grew at the fastest pace since records began, as companies responded to higher demand by scaling up operations and hiring more staff.

Input costs and output prices rose more steeply in May compared to the previous months, highlighting stronger inflationary pressures. Despite these cost pressures, the services sector showed resilience, with firms confidently pushing through price hikes to customers without hampering demand significantly.

India’s Gross Domestic Product (GDP) expanded by 6.5% in FY25, driven by a notable 7.4% growth in the January-March quarter. This growth came despite global economic headwinds and highlights the strength of India’s domestic and export-oriented services sector. For comparison, India had achieved a 9.2% GDP growth in FY24, largely on the back of 7.8% growth in the same January-March quarter, exceeding even the Reserve Bank of India’s 7% forecast.

Looking ahead, the RBI has projected GDP growth of 6.5% for FY26, supported by strong rural demand, public investment, and continuing services exports momentum. These projections underscore the importance of services as a stabilizing and growth-driving pillar of the Indian economy.

However, it wasn’t all positive news on the macroeconomic front. In contrast to the services uptrend, the manufacturing sector witnessed a slight slowdown. The HSBC India Manufacturing Purchasing Managers' Index (PMI), also compiled by S&P Global, dipped to 57.6 in May from 58.2 in April and 58.1 in March, marking a three-month low. This softening reflects a slower pace of new orders and production growth in the manufacturing segment, suggesting a more cautious industrial environment compared to services.

The Composite PMI Output Index, which combines both manufacturing and services data, dropped slightly to 59.3 in May from 59.7 in April. Although still indicating strong economic activity overall, this dip shows that the momentum in services is partially offsetting the decline in manufacturing output.

The divergence between the services and manufacturing sectors is notable. While factory output softened, services rose at a quicker pace, providing balance to the overall economic expansion. This suggests that India’s growth in the current quarter is likely being heavily supported by services-oriented industries like IT, finance, telecom, retail, and hospitality.

What stands out from the latest PMI figures is the robust hiring environment in services. The record rise in employment signals that businesses are optimistic about future demand and are willing to invest in workforce expansion, something that bodes well for consumption-driven growth in the coming months. As more people get jobs, especially in urban areas, disposable incomes are likely to rise, supporting demand for goods and services, and contributing to a virtuous economic cycle.

Inflation, however, remains a concern. Input costs rose faster than the historical average, and companies passed these costs to consumers via higher output charges. If unchecked, such inflationary pressures could lead to tighter monetary policy or squeeze consumer spending. Nevertheless, the fact that demand has remained resilient in the face of price increases indicates consumer confidence and a healthy economic environment.

The report also highlights the resilience of India's export services despite global uncertainties. Indian services, especially in IT, consulting, and business process outsourcing, continue to see international demand, reflecting the competitiveness and reliability of Indian firms in the global market. This global demand is proving to be a key engine behind the services sector’s continued outperformance.

In summary, May 2025 painted a mixed yet promising picture for the Indian economy. While manufacturing faced minor headwinds, the services sector surged ahead, supported by strong export orders, record-high job creation, and firm business confidence. With India’s services PMI at a three-month high and composite PMI reflecting strong overall growth, the outlook for Q1 FY26 looks robust.

The government and policymakers are likely to view these figures as a sign of encouragement. As the Reserve Bank of India looks at these numbers ahead of its next monetary policy review, the strong services performance may give it confidence to maintain a balanced approach between fostering growth and managing inflation.

As India targets 6.5% GDP growth in FY26, the performance of the services sector will be critical. With employment rising and exports performing strongly, the sector continues to act as a pillar of strength for the Indian economy. If this momentum holds, India could not only meet but potentially exceed its growth forecasts, reinforcing its position as one of the world’s fastest-growing major economies.

The coming months will reveal whether this momentum in services can be sustained and whether the manufacturing sector can regain its pace. For now, however, May 2025’s data provides ample reason for optimism about India’s economic direction.

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