India's services sector contracts to 4-year low in July, post GST

Activity in India`s dominant service sector contracted at the sharpest rate in nearly four years in July after a new tax policy sowed confusion and sent new orders into free fall.

New Delhi: The services sector contracted in July and fell to its lowest level in nearly four years following implementation of the Goods and Services Tax (GST), showed a monthly survey on Thursday.

The Nikkei India Services Purchasing Managers' Index (PMI), a pointer to services output on a monthly basis, plunged to 45.9 in July, the lowest since September 2013, from June's eight-month high of 53.1.

The July services PMI also signalled the first downturn in output since the start of this year.

"PMI data for July highlight a reversal in fortunes across India, with the economy going into the reverse mode after seeing a pick-up in growth momentum during June," said Pollyanna De Lima, Principal Economist at IHS Markit, and author of the report.

The launch of GST was cited by services firms as having caused contraction in new work orders, leading to lower activity, the survey said.

The downturn in services follows a similar weakness in the manufacturing sector, which also contracted in July following the GST launch as new orders and output dropped significantly.

Accordingly, the seasonally adjusted Nikkei India Composite PMI Output Index -- which maps both manufacturing and services -- fell sharply to 46.0 in July, from 52.7 in June.

"Private sector activity dipped for the first time since the demonetisation shock and to the greatest extent since early 2009, mirroring the sales trend," Lima added.

Indian service providers, however, remain optimistic about the 12-month outlook.

"Whereas many will question how deep an impact the GST will have on the economy in the near and long term, firms seem convinced that prospects will brighten as the new tax regime becomes clearer," Lima said.

Meanwhile, the Reserve Bank has lowered its key lending rate by 0.25 percent, a move which is likely to translate into lower interest rates for home, auto and other loans as also boost economic activity.