Services growth weakens to a 6-month low in October

BANGALORE Mon Nov 5, 2012 3:19pm IST

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Employees work on the floor of the outsourcing company WNS in Mumbai March 19, 2012.

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BANGALORE (Reuters) - India's services sector grew at its slowest pace in six months during October as weakness in the United States and Europe hurt orders and forced firms to hire fewer workers, a survey showed on Monday, suggesting the worst of the economic slump is not over yet.

Services make up nearly 60 percent of India's economic output and any sign of deceleration darkens the outlook for Asia's third-largest economy, as the sector has been the lone bright spot through the downturn.

The HSBC Purchasing Managers' Index for the services sector, based on a survey of around 400 companies, fell to 53.8 in October from September's seven-month high of 55.8.

Despite the two point month-on-month drop in the headline services reading, the index has, since November last year, held above the 50 mark that separates growth from contraction.

"The services sector slowed in October, but remained firmly in expansionary territory. Growth in new orders eased slightly and firms scaled back the pace of hiring," said Leif Eskesen, an economist at HSBC.

Recession in parts of the euro zone and stuttering growth in the United States have dampened demand for Indian services, forcing them to reduce the pace of hiring, the survey found.

The employment sub-index fell to a five-month low but held above 50.

India's economy grew 5.5 percent in the quarter to June, near a three-year low, held back by a weakening external sector, policy gridlock at home and poor government finances.

GROWTH MOMENTUM

But over the past three months, the government has sought to revive momentum with a series of reforms including raising the price of subsidised diesel and opening up the country's vast supermarket sector to foreign investment as well as aviation, insurance and pension sectors.

Those modest steps have revived investor interest in India and the survey found that the business expectations' sub-index jumped to 68.3 in October from 67.2 in the previous month, reflecting greater optimism.

The survey also showed that prices of services rose at a faster pace in October, in line with the country's persistently high inflation rate that has left the RBI with little room to ease monetary policy to revive faltering growth.

Surging fuel prices and labour costs pushed input and output prices sub-indexes to four- and three-month highs respectively, the survey found.

"Inflation readings continued to tick up, with higher raw material costs and solid demand keeping inflation pressures firm," Eskesen said.

"The latter explains why the Reserve Bank of India remains hesitant about easing monetary policy."

The RBI left interest rates on hold at its October 30 meeting as inflation accelerated to a 10-month high of 7.8 percent in September from a year earlier, despite calls from the government and businesses for a cut to help the slowing economy.

(Reporting by Ruby Cherian; Editing by Sanjeev Miglani)

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