Business activity growth in the Indian service sector cooled further at the start of 2019, amid the weakest upturn in new work since last September. Companies continued to hire, however, with job creation at a three-month high. Moreover, optimism regarding the outlook was sustained. Inflation rates remained mild by historical standards, but costs rose to a greater extent than in December.

The seasonally adjusted Nikkei India Services Business Activity Index fell for the second straight month in January, from 53.2 in December to 52.2, indicating a softer expansion in output. Companies mentioned that growth was supported by favourable public policies, enhanced capacities and greater demand, with the upturn curbed by competitive pressures and election uncertainty.

A sharp and accelerated rise in manufacturing production counteracted the slowdown in activity growth across the service economy. The seasonally adjusted Nikkei India Composite PMI Output Index was at 53.6 in January, unchanged from December and indicative of a solid expansion in private sector activity.

A key factor restricting the rise in services activity was a softer expansion in new work. Firms noted a moderate increase in sales that was the weakest in four months. Underlying data indicated that the slowdown was centred on the domestic market as new orders from abroad grew to the greatest extent since last September, following back-to-back declines at the end of 2018. Opposite trends were noted in the manufacturing industry, where growth accelerated for total order books (13-month high) and softened for external sales (eight-month low).

Services employment continued to expand, with job creation at a three-month high. According to panel members, growth was underpinned by ongoing increases in new business and favourable market conditions. Manufacturers also hired extra staff, albeit to the least extent in five months.

Additional hiring in the service sector failed to prevent a thirty-second consecutive accumulation in outstanding business. Although modest, the rise in backlogs quickened from December. Likewise, unfinished work increased in the goods-producing economy.

Operating expenses at services firms increased again in January, which panel members attributed to higher freight, fuel, meat and medicine prices. Despite picking up to a three-month high, the rate of cost inflation remained well below its long-run average. Although quickening from December. Input prices across the private sector rose at the second-weakest pace since last April.

A softer increase in prices charged for the provision of services was evident in January, with 97% of firms leaving their fees unchanged during the month. There was a renewed upturn in factory gate charges at the start of the year, but the rise was negligible in the context of historical data.

Sentiment among service providers remained positive overall on the back of forecasts of sales growth, marketing initiatives and favourable economic conditions. However, optimism faded to the weakest since last October. Some panellists mentioned that, although they expect output levels to be higher in 2019, improvements are anticipated to take place after the general elections. Manufacturers, on the other hand, were at their most upbeat in four months.

Commenting on the Indian Services PMI survey data, Pollyanna De Lima, Principal Economist at IHS Markit, and author of the report, said, Expansion rates in the Indian service sector have been at similarly modest levels for the past four months, with January data extending the recent trend. There is some sign that growth may run out of steam, in the short-term at least, as seen by the weakest improvement in demand for four months and relatively subdued optimism.

Output growth in the private sector held steady for now, supported by a strengthening manufacturing industry. Should data for services carry on a downward path, we could see a slowdown in GDP expansion in the final quarter of FY18.

The good news came from the Indian labour market. Job creation at service providers was among the strongest seen for the past seven-and-a-half years at the start of 2019. The increasing willingness of companies to hire workers should help reduce still high levels of unemployment in the country.