Growth in India's Services Sector

By Anant Chandak
BENGALURU (Reuters) – Growth in India's dominant services industry picked up last month after dipping to a 10-month low in September amidst a marked expansion in demand, according to a business survey that also revealed a sharp increase in the sector's workforce.

This indicates a relatively strong start for Asia's third-largest economy in the final quarter of 2024, supporting Reuters poll forecasts of 7.0% growth this quarter after 6.8% last quarter.

Services accounted for approximately 55% of gross domestic product (GDP) in the fiscal year 2023-24, as per government data.

The HSBC final India Services Purchasing Managers' Index, compiled by S&P Global, rose to 58.5 in October from September's 57.7, surpassing a preliminary estimate of 57.9. The index has remained above the 50-mark, indicating expansion, for 39 consecutive months.

"During October, the Indian services sector experienced strong expansions in output and consumer demand, as well as job creation," noted Pranjul Bhandari, chief India economist at HSBC.

Robust demand, both domestically and internationally, led to a reacceleration in the new business sub-index and stronger exports to several regions, including Africa, Asia, the Americas, the Middle East, and Britain.

This surge in demand prompted services firms to hire additional staff, resulting in the fastest employment generation rate in 26 months. The business outlook for the coming year remains positive due to optimistic projections, although the index eased slightly from September.

Meanwhile, strong demand allowed service providers to increase their prices in response to three-month high cost pressures stemming from rising expenses for food items—eggs, chicken, meat, and vegetables—as well as labor and transportation costs. This raises the risk of inflation further increasing in the world's most populous country, where it spiked to a nine-month high of 5.49% in September, potentially affecting consumer spending capacity and encouraging the Reserve Bank of India (RBI) to maintain high interest rates.

A narrow majority of economists in a Reuters poll expect the RBI to reduce rates by 25 basis points to 6.25% next month.

Additionally, a manufacturing PMI released on Monday rose to 57.5 last month, and the improvement in services activity pushed the overall Composite PMI up to 59.1 from September's 58.3.