Indian Services Sector Slows Down in November

Service Sector PMI: Services sector activities at an 11-year high, PMI rose to 59 in May


The S&P Global India Services PMI index fell to 56.9 in November 2022 from 58.4 in October, indicating a slowdown in the growth momentum of India’s services sector. This drop was attributed to a decline in new orders and output across most service industries.

Analysis of this news for a layman:

The Purchasing Managers Index (PMI) is an economic indicator derived from monthly surveys of private sector companies. It provides information about the current business conditions in the services sector. A PMI reading above 50 indicates expansion while below 50 signals contraction.

The drop to 56.9 in November, though still denoting expansion, signifies that the pace of growth in the services sector has moderated. Key reasons cited are a slowdown in intake of new work orders as well as a dip in output levels. This means companies reported a reduction in new business inquiries as well as their capacity to provide services.

Four major service industries covered – Financial Services, Real Estate/Business Services, Transport/Communication and IT/Technology, registered slower expansion rates. Costs related to labor, materials, and transportation went up putting pressure on margins. Job creation also took a hit.

Original Analysis:

The services PMI falling to a 12-month low reinforces expectations of India’s economic growth slowing down in the second half of FY 2023-24 after exceptionally strong first two quarters. The RBI has already projected GDP growth to decelerate to 6.5% for the full fiscal year. Persistent inflation, especially in food categories, is weighing on household budgets and consumer demand. Rising costs due to supply chain pressures have started squeezing corporate profit margins too.

This is manifesting in the form of companies cutting back on discretionary spending and new investments as well as slowing down hiring. The loss of growth momentum in the dominant services sector does not bode well for overall economic growth prospects. The only silver lining is that the sector is still in the expansionary zone as per the PMI metric.

Impact on Retail Investors:

The PMI report is a clear signal for retail investors to temper their return expectations from equity investments in the near term. Sectors like banking, financials, IT services etc with high correlation to economic growth may underperform broader indices. This also means that rates cycle has nearly peaked and interest rates could inch down in 2023 second half leading to some relief for rate-sensitive sectors like housing, auto, and consumer durables.

Retail investors need to study Q3FY24 results and management commentaries to assess which sectors/companies have strong fundamentals and competitive advantages to ride out the economic slowdown. Investors should focus on established names over small caps and evaluate using metrics like market share gains, margin resilience, growth in operating cash flows etc rather than just headline revenue/profit growth numbers. It’s also recommended to start staggering investments over the next 3-6 months instead of making lump sum investments at current levels to benefit from potential market dips.

Impact on Industries:

The services slowdown doesn’t augur well for manufacturing and construction industries either which rely on services sector demand to plan their capacity expansion and investments. Sectors like auto, cement, capital goods etc could see even more tempered demand.

Banking and financial services sector profitability could be impacted by the rise in non-performing assets as small businesses face growth and cashflow challenges. Stress could manifest in unsecured lending like credit cards, personal loans etc.

Transport sector would be hit by lower goods movement, business travel etc. Hospitality, travel sectors were just starting to recover from pandemic demand destruction. This slowdown will result in postponed investments and hiring plans. Healthcare industry could see some counter-cyclical boost on the back of resilient demand outlook. Exporters across goods and services too would feel the impact of global growth downgrades leading to slower order flows.

Long Term Benefits & Negatives:

The services slowdown highlights the structural constraints impeding the development of a robust services economy in India spanning infrastructure gaps, restrictive regulations, and lack of openness to foreign competition in several sectors. Part of the reason for moderation is external oriented services like IT are getting hit due to downturn in key export markets like the US, Europe.

In the long run, factors like young demographics, rising disposable incomes, and process digitization are positive for services sector growth. Government reforms to boost digital connectivity, simplify administrative processes, privatize public sector enterprises, and liberalize sectors like healthcare, education etc would provide efficiency gains and growth opportunities. Scope remains large for job creation across organized retail, tourism, logistics etc.

While near-term pain is inevitable, addressing structural issues plaguing the services sector would help raise its competitiveness, quality standards, and export potential over the long run. The current economic reset also provides an opportunity for the services sector to undergo much-needed transformation and consolidation.

Short Term Benefits & Negatives:

In the near term, the services slowdown would negatively impact corporate earnings growth and deter private investments until demand growth visibility improves. This puts the onus back on government spending, especially infrastructure investments, to cushion the downcycle and stimulate growth in the interim.

However, from an inflation standpoint, the slowing economy provides RBI headroom to take a pause after aggressive rate hikes this year. A prolonged low interest rate regime can then set the stage for the next high growth cycle. Softer commodity prices also help ease cost pressures for companies hit by rising input costs this year.

For stock markets, tempered growth forecasts could lead to a realistic resetting of high valuations across discretionary consumption sectors creating opportunities for investors to buy quality names. Lower costs and input prices would also boost margins down the line.

Companies will gain from this:

Defensive sectors like FMCG and pharma with inelastic demand dynamics can gain market share – names like ITC, Dabur, Sun Pharma. Telecom service providers like Bharti Airtel and Reliance Jio would continue to see growth in subscriber additions and data usage. Utility stocks like NTPC, PowerGrid could be seen as safe havens.

With a focus on conserving cash, companies offering consumer finance like Bajaj Finance may see accelerated adoption driving revenues. Already gaining traction, edtech firms like Byju’s and healthcare names like Apollo Hospitals can emerge stronger on the back structural growth tailwinds.

Public sector companies under reform agenda like BPCL, Concor, BEML etc can also attract strategic investor interest. Logistics infrastructure providers like Adani Ports, telecom tower companies like Indus Towers etc with strong cashflows would be better equipped than others to continue expanding capacity.

Companies which will lose from this:

Slowing consumption would negatively impact discretionary categories ranging from autos (Maruti, M&M), consumer durables (Voltas, Havells), entertainment (PVR, Inox) to quick service restaurants (Jubilant Foodworks) and retailers (Trent, Aditya Birla Fashion).

Financials geared to retail loans like HDFC Ltd, Bajaj Finserv would see higher NPAs with job losses and income hits for small businesses in services sector. IT companies like TCS, Infosys, HCL Tech would be impacted by cuts in tech budgets and delays in new digital transformation projects.

Engineering & Capital goods majors Larsen & Toubro, Thermax, Cummins relying on private capex revival would have to contend with shrinking order books. Hotels, restaurant companies like Indian Hotels, Jubilant Foodworks etc would also bear the brunt of weak consumer sentiment.

Additional Insights:

The services PMI data reinforces the view that the Indian economy may experience a ‘growth recession’ rather than a technical recession (two consecutive quarters of GDP contraction). However, resilient domestic consumption provides a cushion against extreme downside risks. Investors need to adapt portfolios viewing the moderation as a period of adjustment rather than a meltdown after a stellar post-pandemic recovery.


The November 2022 services PMI underlines the weakening growth momentum in India’s economy as global headwinds catch up and high inflation trims purchasing power domestically. However, long-term structural tailwinds point to resilience for the services sector which constitutes over 50% of GDP. The cyclical reset gives an opportunity to address competitiveness issues, consolidate market share for organized players, and undertake productivity enhancements laying the foundation for the next high growth phase.


ET Bureau (2022), Nov Services Activity at 1-yr Low as New Orders & Output Shrink, Economic Times

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