India’s Services Sector Growth Hits 17-Month Low Amid Weakening Demand

India’s services sector experienced a significant deceleration in June, recording its slowest expansion in 17 months as domestic demand faltered. While the sector remains in growth territory, a sharp decline in new orders and stalled recruitment efforts signal emerging headwinds for the nation's economy.

Sharp Decline in Services PMI and Domestic Demand

According to the latest HSBC India Services PMI survey, the seasonally adjusted Business Activity Index dropped to 57.4 in June, down from 59.8 in May. Although the reading remains above the 50-mark threshold—indicating that the sector is still expanding—the momentum has slowed considerably.

The primary driver behind this slowdown is a cooling domestic market. The survey highlighted the weakest increase in new orders in over two-and-a-half years, suggesting that local client interest and purchasing power have softened. Pranjul Bhandari, chief India economist at HSBC, noted that these figures point toward increasingly challenging market conditions and weaker demand, particularly within the domestic landscape.

Stalled Hiring and Weakening Business Confidence

The slowdown in business activity has had a direct impact on the labor market. After seeing robust recruitment during April and May, hiring activity nearly came to a standstill in June. Only approximately 1% of surveyed firms reported additional recruitment, marking a significant cooling in job creation within the services industry.

Compounding this issue is a dip in business confidence, which has fallen to a five-month low. Companies surveyed cited several factors contributing to this cautious sentiment, including intensifying competition, difficult economic conditions, and growing concerns regarding the depreciation of the Indian Rupee.

Robust Export Demand as a Counter-Trend

Despite the slump in domestic consumption, the services sector found a vital lifeline in international markets. Overseas business remained a bright spot, with export orders hitting a three-month high. This growth was fueled by strong demand from a diverse range of global clients, including those in the United States, UAE, Singapore, Canada, Germany, Australia, and several Middle Eastern nations like Qatar and Oman.

Furthermore, price pressures appeared to be easing. Input cost inflation reached its lowest level since November, and output price inflation moderated, aided by the easing of geopolitical disruptions in the Middle East.

Broader Economic Implications: The Composite PMI

The slowdown in services is also reflecting in the broader private sector. The HSBC India Composite PMI Output Index, which aggregates both manufacturing and services activity, slipped to 57.1 in June from 59.3 in May. This decline indicates a synchronized slowdown, characterized by softer sales volumes and the slowest employment growth seen so far in the current cycle.

Key Takeaways

• Growth Moderation: The services PMI fell to 57.4 in June, marking a 17-month low driven by the weakest increase in new orders in over 30 months.
• Employment Slowdown: Hiring activity has largely stalled, with only 1% of firms reporting new recruitment in June.
• Export Resilience: While domestic demand weakened, export orders reached a three-month high, supported by strong demand from the US, UAE, and various European and Asian markets.