Manufacturing expands, but Covid-19 second wave weighs on service sector in July

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The services sector activity in the country remained out the reach of the march towards the recovery mode of different sectors of the economy that are within kissing distance of pre-pandemic levels with IHS Markit, a prominent research and analytics company, revealing that the services sector shrank for the third month in a row in July. Ironically, in the two past decades the services sector – including telecom, hospitality, tourism, entertainment, IT — has propelled the economy to greater heights, increasingly gaining a bigger share of the economy and generating more jobs than other sectors.

Contraction zone

Services Purchasing Manager’s Index which is prepared by IHS Markit, remained below the level of 50, which serves as the dividing line between growth and shrinkage. The value of the index stood at 45.4 in July. In June it was 41.2.

Manufacturing up

Significantly, the services sector conspicuously contrasted with the manufacturing sector. The index of the same agency in manufacturing – IHS Markit Manufacturing Purchasing Managers’ Index – breached the 50 level and rose to 55.3 in July. This index, too, was at 48.1 in June representing contraction.

E-way bills, GST

Two vital indicators displayed an upswing in July – E-way bills and GST collection.

E-way bills, an indicator of the movement of commercial goods across the country, stood at 6.42 crore in July, a figure that is the highest in four months. It was also 17% higher than June.

Goods and Services Tax collections rose to Rs 1.16 lakh crore in July, rising 33% compared to the collections in July 2020 and about 26% up from the Rs 0.92 lakh crore collected in June 2021.

Exports

In the April-June quarter, the country achieved $95 billion worth of exports which is a record. The value is 16% higher than the highest Q1 exports of FY19 which was at $82 billion and the earlier peak of $90 billion exports in Q4FY21, the Union commerce ministry had revealed in early July.

Attributing the slowdown in services directly to the pandemic, Pollyanna De Lima, economic associate director of IHS Markit, said: “The current COVID-19 environment continued to weigh on the performance of the service sector that is so crucial to the Indian economy.”

Inflation

She also remarked that business confidence took a hit since there was uncertainty about how long the pandemic will last and concerns about inflation and other financial trouble.

The IHS Markit official’s comments about business confidence taking a hit was borne out by a survey by the National Council of Applied Economic Research that showed that showed the index has suffered a 27.5% dip in April-June quarter compared to the January-March quarter of FY21.

Monetary policy

A vital ingredient to the recovery process is expected to be announced on August 6 when the monetary policy committee of Reserve Bank of India will announce its decision. It is widely held that the central bank will hold key rates like repo and CRR unchanged and maintain accommodative stance which basically means the bank is ready to infuse funds to fuel growth. RBI governor Shaktikanta Das had earlier said that the priority is to stoke growth.