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India’s Services Sector Drives Economic Momentum Despite Slower Manufacturing Growth
Team Finance Saathi
06/Jan/2025
What's covered under the Article:
- India's services sector grew at a four-month high in December, boosting overall business activity.
- Manufacturing growth slowed to a 12-month low, indicating challenges in the industrial sector.
- Positive business sentiment in the services sector suggests continued optimism for the near future.
India's Services Sector Drives Economic Growth Amid Manufacturing Slowdown
In December 2024, India’s services sector continued to shine, driving business activity to a four-month high despite a slowdown in manufacturing growth. The HSBC India Services Purchasing Managers’ Index (PMI) rose to 59.3 in December, up from 58.4 in November and a clear indicator of ongoing expansion. This marks the 41st consecutive month that the PMI has remained above the 50-point threshold, which distinguishes expansion from contraction.
The strong performance in the services sector has provided a much-needed boost to India’s economy, especially as the manufacturing sector shows signs of slowing down. The services industry, which makes up more than half of India’s gross domestic product (GDP), has proven resilient, contributing to the country’s economic momentum.
Services Sector Buoyed by Strong Demand
The underlying demand in the services sector was identified as the key factor behind the growth. New orders increased for the 41st month in a row, with companies reporting the greatest increase in orders since August 2024. This surge in business activity was reflected in the hiring of additional workers by many service providers, as per the survey conducted by HSBC, which surveyed 400 service firms across India.
India’s services sector has been the cornerstone of its economy, contributing significantly to its economic expansion. Despite the overall slowdown in manufacturing, the services sector continues to display strong momentum, providing a buffer against the broader economic challenges.
Economic Growth and Slowdown in Manufacturing
India’s GDP growth in the fiscal year 2023-24 reached an impressive 8.2%, exceeding the Reserve Bank of India’s (RBI) forecast of 7%. However, the first quarter of 2024-25 saw a slower growth rate of 6.7%, and by the second quarter of FY25, growth had further softened to 5.4%—the slowest in nearly two years. The manufacturing sector has faced challenges due to softer increases in factory orders and production.
The HSBC India Manufacturing PMI dropped to 56.4 in December, down slightly from 56.5 in November. This indicates that while the manufacturing sector is still expanding, the growth rate has slowed considerably compared to earlier months.
Business Sentiment and Inflation Impact
Despite the slowdown in manufacturing, India’s services companies remained optimistic about future prospects. Forward-looking indicators, such as new business and expected future activity, suggest that this strong performance is likely to continue in the near future. The easing of input price inflation in December also helped support the positive sentiment among businesses.
In December, firms reported a softer increase in cost burdens, especially for food, labor, and materials. Notably, selling price inflation eased during the month, further improving business sentiment in the services sector.
Composite Output Index and Economic Outlook
The HSBC India Composite Output Index, which combines both services and manufacturing output, rose to 59.2 in December from 58.6 in November. This composite index suggests that, overall, private sector companies in India posted faster growth in output at the end of the year. The acceleration in services business activity more than offset the slowdown in manufacturing growth.
India’s economic growth outlook remains positive, with the finance ministry forecasting a 6.5% growth in 2024-25, and the RBI estimating 6.6% growth for the same period. This optimistic outlook is buoyed by strong rural consumption, increased government investment, and robust services exports.
Conclusion: Optimism for the Future
While India faces a slowdown in manufacturing, the services sector continues to show strong momentum, lifting overall business activity. With inflation easing and demand remaining high, services firms are optimistic about continued growth in the near term. However, the country’s economic slowdown in the last two quarters serves as a reminder of the challenges ahead, particularly in the manufacturing sector.
India’s services sector remains a bright spot in the economy, and its continued expansion is expected to play a crucial role in maintaining the country’s growth trajectory.