The service sector will remain the Achilles heel of the global recovery

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MUMBAI: India’s composite PMI production index continued to contract in August, led by the service sector. The reading of this index, which measures combined services and manufacturing output, was 46 in August. Despite an improvement from 34.2 in July, the index failed to break above the crucial 50 mark, which separates expansion from contraction.

The overall decline was centered in the service sector, with manufacturing output increasing for the first time in five months, according to the IHS Markit investigation report. Similar trends were evident for new orders, as growth in manufacturing partially offset a further reduction in services, the report added.

India’s seasonally adjusted services trade activity index rose sharply from 34.2 in July to 41.8 in August. In contrast, the manufacturing PMI rebounded towards the expansion zone, going from 46 in July to 52 in August.

“The fact that the services reading remains lower than the manufacturing reading underscores the vulnerabilities of the service sector in this crisis. In particular, concerns about the virus and the continued need for social distancing will weigh more heavily on companies that depend on physical interactions such as retail, leisure and hospitality, ”said Shilan Shah, Indian economist at Capital Economics, Sept. 3.

As daily new cases of covid-19 continue to rise sharply in India, many restrictions are likely to remain in place for an extended period. There are fears that in areas where viral infections are increasing particularly rapidly, further tightening of measures may be introduced.

Not surprisingly, business confidence in service providers about the future has remained subdued. “Two-thirds of respondents expected production for the coming year to remain unchanged from current levels. While some companies have been hoping for the adoption of COVID-19, others have noted market uncertainty and expectations of extended lockdown measures to weigh on future activity, according to the investigation report.

In short, the improvement observed in the manufacturing sector could run out of steam. Second, the service sector would remain a pain point at least in the short term. All of this means that the Indian Reserve Bank’s loose monetary policy is here to stay.

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