Is improving pricing power of services providers a blip?

New business inflows rose markedly and at the quickest pace in three months, supporting a sharp expansion in output and further job creation for the services industry, said the survey report.

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While demand has been resilient, input cost inflation remains sticky for the services industry, with the index at 56.5 in November from 56.8 in the previous month. In contrast, the input cost pressure for Indian manufacturers was the weakest in 28 months in November and the reading was below its long-run average.

But thanks to the demand buoyancy, service providers continue to pass-on the burden of elevated costs to consumers, thus, protecting their margins. The index measuring prices charged for services rose for 21 months in a row in November and was the strongest since July 2017. And this has given the business confidence of Indian services providers a boost. However, it’s far too soon to say if the jump in the services sector’s output price component is the start of a new trend or merely a single-month blip. “Reassuringly, the August leap in the future activity sub-index to the low-60s, following a prolonged spell in the low-50s, is holding up, indicating more enduring confidence on long-term prospects,” said Miguel Chanco, chief emerging Asia economist at Pantheon Macroeconomics.

In any case, steep price hikes taken by services providers bode well at the micro level, but are likely to have an adverse impact at the macro level.

According to Gaura Sen Gupta, economist at IDFC First Bank, goods core inflation peaked at 10.1% year-on-year in April 2022 and subsequently moderated to 7.1% in October 2022, but the recovery in services has taken longer. It is now gaining traction as consumption patterns normalize post covid-19, from goods towards services, she said. So, she expects core CPI (consumer price index) inflation to remain elevated in the remainder of FY23, driven by services inflation.

In this context, the Reserve Bank of India’s meeting on 7 December is crucial. Going by the consensus estimate, the central bank is expected to announce a 35 basis points repo rate hike. One basis point is 0.01%.