HSBC Markit’s India PMI index, which measures manufacturing and services performance, has slipped to its lowest level since April 2009, with Nomura expecting India GDP growth rate to slip below 5%

Hopes for economic recovery are likely to be dashed, if the Purchasing Manager’s Index (PMI) is anything to go by. It is not just manufacturing and agriculture that is getting affected but services too. According to the latest data, HSBC Markit PMI index, services sector PMI declined to 49.3 in July, its lowest since April 2009, from 51.5 in June.  The output index sharply declined to 47.9 in July from 51.7 in June, while the new orders index fell to 47.8 in July from 51.9. Both the input and output price indices moderated, suggesting that weak demand is also constraining pricing power in the services sector.
 

In a report, Nomura Financial Advisory and Securities (India) Pvt Ltd said, “In our view, the weakness in manufacturing appears to be spilling over into the services sector and this is likely to continue this year. We expect banking/financial services and the trade/transportation output growth to weaken. Hence, despite better agriculture growth, we expect GDP growth to remain weak at a below-consensus 5.0% y-o-y in FY14, the same as in FY13, due to slower non-agriculture growth. We expect policy rates to remain on hold in FY14, followed by 75bp of cumulative repo rate cuts in FY15.”
 

Commenting on the India Services PMI survey, Leif Eskesen, chief economist for India & ASEAN at HSBC said, “Activity in the service sector contracted in July led by a drop in new business, which also led to a decline in optimism among the surveyed companies. Meanwhile, inflation gauges softened on the back of weaker demand and tough competition. While the RBI has to cater to the currency at the moment, it will eventually need to cater more to growth as economic activity continues to soften.”
 

Manufacturers and service providers both recorded lower output levels, amid evidence of falling new business and a difficult economic climate. “Down from 51.7 in June to 47.9 in July, the seasonally adjusted HSBC Services Business Activity Index registered below the 50.0 no-change mark for the first time since October 2011 and was consistent with a moderate contraction,” said the report from HSBC India Services PMI.
 

Inflation, especially food inflation, continues to be a pressing concern for policy makers, politicians and bureaucrats, with elections less than a year away. However, Reserve Bank of India (RBI) has mostly turned a blind eye towards it and has been pushing for a growth-oriented policy. However, it is pertinent to note that inflation isn’t just affecting the poor, but also the services sector. HSBC notes: “Input cost inflation across the private sector economy picked up to the sharpest in five months. Where input costs rose, service providers reported higher prices paid for fuel, labour and raw materials.”
 

Other reasons for poor output are incessant power cuts and raw material shortages at suppliers. The agriculture sector over the last few years have been grappling with erratic monsoons, poor power supply in villages, which has affected their supply. The power sector has been in doldrums for the past few years, which has stymied the manufacturing sector.
 

Yet, even the financial sector is not immune. Nomura has warned that banking and financial services growth rate as well as trade output is likely to be weaker, and expects GDP growth rate to dip below 5% by 2014 fiscal. However, they have retained some sense of optimism by expecting interest rate of75 basis points in 2015.
 

The potent combination of inflation, poor manufacturing, services and agriculture has made many analysts and investors jittery. The continued volatility in the market has thrown the seeds of caution into the wind.
 

Refer to our cover story on what investors can expect ahead over here (Turbulence ahead for equity, bonds and gold!)