India service sector worst since 2011, fuels gloom

NEW DELHI: India’s services sector, which contributes 60 percent of national output, shrank for the first time in nearly two years in July, figures showed Monday, fueling pessimism about an early economic recovery.
The figures suggest “a near-term recovery in growth is not in the cards and confidence remains subdued,” said HSBC chief Asian economist Leif Eskesen.
The HSBC services Purchasing Managers’ Index (PMI) contracted for the first time since late 2011 to 47.9 points in July from 51.7 points in the previous month. Fifty is the mark that divides expansion from contraction.
The widely followed index reading was also the lowest since April 2009.
The numbers, the latest in a string of weak data, come as India faces testing times — hit by capital flight against a backdrop of slow growth, a tumbling currency, a huge current account deficit, corruption scandals and sluggish reforms.
Nervous foreign investors pulled a total of $10.5 billion from the Indian equities and debt market in June and July alone.
The rupee has been setting record lows against the dollar and the central bank has been forced to keep interest rates high to brake the currency’s fall rather than lowering borrowing costs to spur growth.
Eskesen said the government’s recent moves to open up a still heavily state-dominated economy are welcome.
But they need to be translated into action on the ground to bring back foreign and domestic investors and “get the wheels turning again,” he said.
Investors fret that the embattled Congress-led coalition will be unable to take bold action due to political controversies, and because lawmakers will increasingly jockey to win points with voters before polls due by mid-2014.
The government wants to pass a landmark food security bill to give cheap grains to hundreds of millions of poor — a measure it hopes could propel it back to power.
It is also trying to win approval for key financial measures, including widening foreign investor access to the insurance and pension fields.
But Monday’s parliament session opening repeated a familiar pattern of adjournments — in this case triggered by opposition uproar over a government plan to create a new southern state that has sparked demands by other regions for statehood.
The last session was one of the most unproductive on record, disrupted by protests over alleged government graft.
The government is desperate for an economic revival after India logged growth of five percent last year, its lowest pace in a decade.
With manufacturing in the doldrums, it has been hoping for a services pickup to drive an upturn.
Finance Minister P. Chidambaram just last week predicted the services sector might perform better than last year.
But confronted by other downbeat data, many economists have already cut growth forecasts to the low five percent range from earlier projections of six percent and higher.
Days earlier, HSBC’s manufacturing growth index showed India’s factory output slowdown deepened in July, with order books contracting by the most in over four years.
India’s currency firmed slightly to 60.88 rupees to a dollar Monday but was still close to its lifetime low of 61.21 rupees set last month.
Analysts say keeping interest rates high may choke the once-booming economy and cause more currency weakness, triggering a vicious circle.