India's services sector output fell for the second month in a row in August as business activity and new work orders were hit by disruptions caused by the new GST regime, a monthly survey showed on Tuesday.
However, it was not "all doom and gloom" as business orders and jobs fell at a slower rate than in July, as per the PMI (Purchasing Managers' Index) survey.
The Nikkei India Services PMI Business Activity Index improved slightly from 45.9 registered in July to 47.5 in August, but remained below the crucial 50-mark for the second straight month.
A reading above 50 indicates expansion, while a score below this mark means contraction. A contraction for two consecutive months was last seen in November-December 2016 after the government's demonetisation decision.
While manufacturing sector rebounded into growth zone during August, a composite index for services and manufacturing sectors continued to show contraction.
"Services acted as a drag on the private sector economy in August, with the reduction in business activity offsetting growth of manufacturing production," said Pollyanna De Lima, Principal Economist at IHS Markit, and author of the report released.
Though the downturn was less severe than in July, jobs were shed due to fewer workloads and backlogs also got accumulated. The services sector had slipped into contraction in July as confusion caused by the GST (Goods and Services Tax) rollout triggered a dip in new business orders.
In August, survey respondents felt that the new taxation system and advertising campaigns are expected to support growth, but there were worries about competitive pressures.
"The underlying trend for services is one of uncertainty. Businesses are holding back on investment, leading to fall in employment. At the same time, input costs are increasing and firms are unable to fully pass these on due to competitive pressures," Lima added.
Service providers retained an optimistic view towards the year-ahead outlook for activity, overall sentiment decreased in August. Lima further said "it's not all doom and gloom" as business activity, new business and employment showed much slower rates of reduction than those recorded in the July survey. The country's manufacturing sector moved back into growth zone in August on surge in new business orders after the GST- related contraction in July.
But this growth was insufficient to offset the contraction in services activity and accordingly the overall private sector output remained in the contraction zone.
The Nikkei India Composite PMI Output Index rose from July's 100-month low of 46.0 in July to 49.0 in August. On the prices front, there was "muted inflationary pressures" in the services sector. Companies said they paid more for beverages, food, fuel and paper and passing on to consumers only part of the additional cost burden, it added.