Economy | Thu Oct 4, 2012 12:04pm IST

India's services sector grows at fastest pace in 7 months

BANGALORE (Reuters) - India's services sector expanded at its fastest pace in seven months as a spurt in new business encouraged firms to hire more staff, a survey showed on Thursday, suggesting the worst of the economic slump may be over.

The HSBC purchasing manager's index for the services sector, which gauges the activity of hundreds of Indian companies, rose to 55.8 in September from August's 55.0.

A reading of 50 and above separates growth from contraction and the index has held above the break-even mark since November last year.

India's services sector makes up for over 60 percent of the country's gross domestic product and a strong reading in HSBC's survey augurs well for the economy, where growth has faltered in recent months against the backdrop of political upheaval.

"Service sector activity grew at a faster clip in September led by firm demand, underscoring (its) resilience," said Leif Eskesen, an economist at HSBC.

"This further lifted employment, which helped businesses keep up with orders."

The new business sub-index surged to its highest since February allowing firms to hire more workers, and employment touched a 15-month high.

But survey participants are now less optimistic about the future. The sub-index measuring business expectations, a gauge of what firms think conditions will be like in a year's time, fell to 67.2 from 74.0 in August.

Policy measures taken by the U.S. Federal Reserve and the European central bank to shore up their respective economies have led to an increase in demand for Indian services. Still, the fragile recovery in the U.S. and a dire euro zone economy pose a threat to India's export dependant services sector.

Growth in Asia's third-largest economy languished near its slowest in three years at 5.5 percent in the quarter ended June, as the lack of reforms by New Delhi and high interest rates hurt investment.

Determined to regain investor confidence and bring the economy back on track, the government launched a slew of reforms last month by slashing fuel subsidies and inviting foreign investments in retail, aviation and broadcasting.

RISING PRICES

Prices also rose at a faster pace in September from the previous month, the survey showed. That could further fuel wider inflation in the economy where the wholesale price index rose to 7.55 percent in August after a temporary slip in July to a three-year low.

Liquidity injections from the Fed and other major central banks have in the past pushed global commodity prices higher and resulted in rising inflation in emerging markets.

That could pose a complication for the Reserve Bank of India which, although determined to fight inflation, may find the task difficult.

"The RBI has limited room for policy rate cuts given the persistence of inflation, although further progress on fiscal consolidation and structural reforms may eventually pave the way for some easing," Eskesen said.

A similar survey on Monday showed factory activity expanded at a steady pace in September as new orders and output rose.

(Reporting by Ruby Cherian; Editing by Sanjeev Miglani)

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