Service sector activity in July slowed to its lowest level since September 2013, due in large part to the implementation of the Goods and Services Tax, according to a private sector survey.
The Nikkei India Services Purchasing Managers’ Index registered a reading of 45.9 in July, falling from the eight-month high of 53.1 seen in June. A reading over 50 indicates expansion and one below 50 implies a contraction in activity.
“Business conditions in India’s service economy deteriorated markedly in July following the implementation of the Goods and Services Tax (GST),” the report said. “Output and new work declined for the first time since January, with rates of reduction the quickest since September 2013.”
‘Lack of knowledge’
“That said, firms expressed a lack of knowledge regarding the GST and expect more clarity in the near-term to lead to activity growth,” the report added. “Confidence for the year ahead was, in fact, the strongest since August 2016.”
The slowdown in services activity coincides with a similar sharp slowdown in manufacturing activity in July, with the Manufacturing PMI registering a reading of 47.9, the lowest it has been since February 2009.
“PMI data for July highlight a reversal in fortunes across India, with the economy going into reverse mode after seeing a pick-up in growth momentum during June,” Pollyanna De Lima, Principal Economist at IHS Markit, and author of the report said. “The downturn in services follows similar weakness in manufacturing, to make a double-whammy of disappointing news at the start of the second quarter of the 2017-2018 financial year.”
Ms. De Lima, however, highlighted the fact that while the slowdown was attributed to the implementation of the GST, confidence for the future was at a 11-month high.
Services firms surveyed said that the introduction of the GST had caused a contraction in new work, leading to lower activity. This drop in new business inflows resulted in a fall in output, the first such case since January, and the most pronounced in almost four years, the report added.
“At the same time, outstanding business in the service economy rose to the greatest extent in five months,” the report said. “Delayed payments from clients was cited as the main reason leading to higher backlogs.”