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The worst is not over for India’s Covid-hit services sector

(ATF) The worst, it seems, is not over for the Indian services sector that continued to lose steam in December as a resurgence in coronavirus infections weighed on new business and employment, a private survey showed on Wednesday.

The country’s services activity expanded at a slower pace in December as rates of growth in sales eased to a three-month low and staff hiring came to a halt amid weak business optimism.

The Nikkei/IHS Markit Services Purchasing Managers’ Index fell to 52.3 in December from November’s 53.7 but held above the 50-mark separating growth from contraction for a third straight month.

“A spike in Covid cases was reported as a key factor restricting growth of new work intakes among service providers, which in turn curbed the rise in output and led to increased business uncertainty about the outlook,” Pollyanna De Lima, economics associate director at IHS Markit, said in a release.

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India has the second-highest number of coronavirus infections in the world.

And although, on Sunday it approved two coronavirus vaccines for emergency use, it could take years to vaccinate over 1.3 billion people with its rudimentary healthcare system, IHS said.

While Asia’s third-largest economy has been gradually recovering from a coronavirus-induced recession, the survey added, it is not expected to return to pre-pandemic levels soon, especially within the service industry – the engine of economic growth and jobs in the country,

The services sector, a key driver of India’s economic growth, is the dominant sector in India’s GDP that has also attracted significant foreign investment and contributed significantly to exports.

According to the Central Bank, the Reserve Bank of India, this sector contributed 55.39% to India’s Gross Value Added at current price in the financial year ending 20 and has provided large-scale employment covering a wide variety of activities. These include trade, hotel and restaurants, transport, storage and communication, financing, insurance, real estate, business services, community, social and personal services, and services associated with construction.

“Given the damaging impact of the pandemic on the service economy, some companies are facing financial difficulties, which is preventing staff hiring. December saw the ninth round of job shedding in ten months,” De Lima added.

Even as more services opened up post-pandemic, industry sources say pricing power came under some pressure despite the higher input costs, and that led to a lack of discretionary spending, impacting expansion of business and workforce.

Expansion continues

Yet, with services PMI (seasonally adjusted) remaining above 50 in December, the upside is the sector has now been in expansion territory for three straight months, after contracting for seven months following the outbreak of the pandemic.

“While manufacturing initially recovered more quickly, the gap between the manufacturing and services PMIs has narrowed in past three months, likely reflecting a revival in demand for services and a levelling o? in manufacturing activity plateaued following an initial spike,” said a Barclays Bank report.

The modest decline, added the Bank, was a result of minor pullbacks in subcomponents.

Demand from abroad remained firmly in contraction territory as many countries reimposed lockdown measures to contain a fresh spike in Covid cases.

Vaccine to help

The big picture however, is that both the services and composite readings are still stronger across the October-December quarter whole compared to the previous quarter, according to analysts.

“The economy is on the mend. The recent services PMI readings are particularly welcome given that the sector remained a considerable drag on growth in the third quarter of last year, contracting by 12% year-on-year compared to the 7.5% y/y overall drop in GDP,” said a Capital Economics analysis.

Even so, the severe downturn- exacerbated by the government’s slow and weak fiscal support – will leave lasting wounds in the form of firm closures and unemployment, it added.

Looking ahead though, despite the uncertainties regarding its distribution, the approval of Covid vaccines over the weekend bolsters the case for a further economic recovery this year.

“We remain cautiously optimistic that policymakers will be able to roll back restrictions on most domestic activity around the second half of 2021. Fears over the virus should subside this year too,” Capital Economics said

Businesses that depend on physical interaction such as retail, leisure and hospitality could gain as a result, experts hope.

(With reporting from Reuters)

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Indrajit Basu

Indrajit Basu is an India-based correspondent for Asia Financial and wears two hats: journalist and researcher (equity). Before joining AF he reported on business, finance, technology, wealth management, and current affairs for China Daily, SCMP, UPI, India Today Group, Indian Express Group, and many more. He is also an award-winning researcher. If he didn't have to pay bills, he would be a wanderer.

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