India's services PMI hits 17-month high in June

New Delhi: The first full month under the Narendra Modi government's watch has thrown up possibly the best economic data in a while, bringing cheer ahead of a budget that's expected to unveil measures aimed at sparking a recovery after a slump that has seen growth stay below 5% for two years in a row.

Services activity rose to a 17-month high in June on the strength of robust order flow, a private survey showed on Thursday, indicating rising optimism in the sector that has a share of more than 60% in the economy. The HSBC PMI rose to a vigorous 54.4 points in June from 50.2 in May, well over the 50-point mark that separates expansion from contraction.

This was the biggest one-month rise in four years in the survey-based index that polled responses from more than 350 service providers. This is the second successive month of expansion after 10 months of contraction.

"After months of subdued activity, the Modi wave has struck the services sector and lifted growth to a 17-month high. New business flows and stronger business sentiment supported the rise. Some of this is simply pent-up demand being unleashed," said Frederic Neumann, co-head of Asian economic research at HSBC.

The dramatic jump in the index was a combination of a pick-up in activity on the ground and positive sentiment, said Shubhada Rao, chief economist, YES Bank.

"An anecdote can be drawn from auto sales that showed a turnaround across segments, which implies that business activity is picking up on the ground," she said. "Even if it is a survey, it won't show such a dramatic increase in just one month based only on sentiment. Though part of it is riding on hope, if the budget and subsequent ongoing reforms continue to spell positive environment on investment, spillover will actually be on services."

Another economist suggested that sentiment had more to do with the spike.

"I would not like to read too much into the survey result as there has not been any turnaround in manufacturing or agriculture, which could support a services growth to this effect," said Madan Sabnavis, chief economist, CARE Ratings. "Banking credit growth is low. So it is mostly the sentiment part that led the index for June."

Poor monsoon rain and the Syria-Iraq crisis are potential negative influences in the near term, HSBC said.

The buoyancy follows a small rise in manufacturing PMI in June, suggesting that the economy could finally be emerging from a decade-low slump. Carmakers reported strong sales in June.

The Indian economy expanded 4.7% in 2013-14, barely ahead of the decade-low 4.5% recorded in 2012-13.

Services expanded 6.7% in 2013-14 compared with 7% in the previous fiscal year, according to data from the Central Statistical Office.

Services PMI averaged 51.1 in the first quarter of the fiscal, the highest since the first quarter of the previous fiscal.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.