Services sector hit by rising costs and Covid-19

For the second time in a row, the growth of the service sector fell in December. It was in addition to a spike in costs and Covid-19 cases and global travel bans.

The services PMI fell to 52.3 in December 2020 from 53.7 in the previous month. Global Covid-19 restrictions particularly travel bans, restricted international demand for Indian services at the end of 2020. The input costs also increased to the highest level since February as the survey participants reported higher prices for various items, including cleaning products and fuel, a IHS Markit report said.

Even as the companies are optimistic that output will increase in 2021, the overall level of positive sentiment fell from November as the optimism was curbed by uncertainty surrounding the Covid-19 pandemic, rupee depreciation, and inflationary pressures.

While transport and storage; consumer services and finance and insurance remained the brightest spots, contractions were seen in information & communication and real estate and business services.

“The slowdown is particularly notable given the size of the sector, the fact that the recovery only began in October and that monthly rates of increase in new business and output were moderate relative to those seen in the manufacturing industry,” said Pollyanna De Lima, Economics Associate Director at IHS Markit.

To add to the testing conditions services firms are facing, their expenses continued to rise while pricing power diminished, De Lima added. It is clear that the early part of 2021 will continue to be challenging, but there is likely to be a sustainable recovery, and some return to normality once Covid-19 vaccines become available, she further said.

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. Job shedding was resumed in December, with some firms mentioning that liquidity problems, labour shortages, and subdued demand caused the latest fall in employment, the report said.

Private sector employment made a ten-month sequence of contraction in December; however, the rate of reduction was slight, but quickened from November.