Whalesbook
Services Sector Activity Surges on Domestic Strength
India's services sector activity saw significant growth in April, with the services Purchasing Managers' Index (PMI) rising to 58.8 from 57.5 in March. This marks the highest expansion rate in five months and shows continued positive momentum, well above the 50-point level that signals growth. The expansion was mainly driven by strong domestic demand, boosted by competitive pricing, the growing impact of e-commerce, and increased demand for relocation and logistics. Consumer services led the way, supported by transport, information, and communication sectors. The overall private sector also saw renewed strength, with the HSBC India Composite PMI rising to 58.2 in April from 57.0 in March. This indicates robust economic expansion, though the pace is among the slowest in about two and a half years. India's services growth rate in April also outpaced China's PMI of 52.6, highlighting domestic economic strength.
Global Tensions Slash Export Orders
However, international demand for Indian services faced a sharp downturn. New export orders grew at their slowest pace in over a year. Survey participants linked this directly to the conflict in West Asia and a drop in inbound tourism, which disrupted trade routes and shipping. The regional instability resulted in higher shipping costs, delays, and extra charges for exporters. Trade with West Asia, a key market for India, saw exports slump 58% in March, with exports to the UAE down 62%. Services exports for the fiscal year 2026 reached $418.3 billion, a 7.9% increase, but current geopolitical disruptions signal challenges ahead for new export orders.
Costs Rise, But Firms Limit Price Increases
Service providers still faced high operating costs in April. Input costs for food items, gas, and labor remained elevated. While overall cost inflation eased slightly from previous months, it stayed near recent highs. Notably, companies absorbed much of these higher expenses, passing only a small amount to customers. This led to output price increases easing to a three-month low. This approach may protect customer demand but pressures company profit margins, particularly if input costs keep rising without matching price hikes. The services sector's contribution to India's Gross Value Added (GVA) is about 55% of the total, making stable margins important for the economy.
Hiring Picks Up, Future Outlook Dims
Hiring activity increased at the start of the fiscal year, as companies hired more staff to manage rising business volumes. Employment growth in the services sector reached its fastest pace in 10 months. Despite this hiring boost and strong domestic demand, business confidence for the next 12 months weakened compared to March. This dip in optimism was mainly due to ongoing concerns about the West Asia crisis and persistent cost pressures. This suggests caution about sustaining current growth given external uncertainties and inflation.