New Delhi: India’s services activity suffered a shock collapse in April 2020, with the national lockdown aimed at combating the COVID-19 pandemic exacting a deep economic price.
The grim result for the industry, the engine of economic growth and jobs, underlined the pandemic’s sweeping impact across India as authorities extended a nationwide lockdown, in effect since March 28, until May 17.
The Nikkei/IHS Markit Services Purchasing Managers’ Index plunged to an eye-popping 5.4 in April from March’s 49.3, an unprecedented contraction since the survey first began over 14 years ago.
It also shattered a Reuters poll forecast of 40 and was way off the 50-level separating growth from contraction, with the single-digit outcome marking by far the most extreme result among major economies.
“The extreme slide in the headline index, which fell by over 40 points, shows us that the strict lockdown measures have led to the sector essentially grinding to a complete standstill,” Joe Hayes, an economist at IHS Markit, said in a press release.
All of the survey’s key gauges plummeted. An index measuring foreign demand for services ceased to an unprecedented 0.0, while an overall demand index also fell to a historic low and firms laid off workers at the quickest clip ever.
The pandemic had already cut short the good times in India’s services sector, which had seen contraction in March because overseas demand fell and exports received a hard knock.
But in April, the firms surveyed said measures to stem the spread of the coronavirus, such as restrictions on the movement of citizens and shutdowns in important sub-sectors like information technology, hospitality and transportation wiped out almost all business. As many as 97% of the 500-companies surveyed by IHS Markit which conducts the survey, reported a fall in output.
The latest findings came on the heels of a sister survey on Monday showing factory activity contracted at its sharpest pace on record.
That, combined with a services sector in freefall, dragged the composite PMI to an all-time low of 7.2 last month from March’s 50.6 and pointed to a crippling economic blow.
A Reuters poll showed the Indian economy is likely to suffer its worst quarter since the mid-1990s in the April-June quarter, contracting 5.2%.
The economic shock is likely to put pressure on Prime Minister Narendra Modi to unveil new measures but the government has limited fiscal policy space to respond to the crisis.
“Historical comparisons with GDP data suggest that India’s economy contracted at an annual rate of 15 per cent in April. It is clear that the economic damage of the COVID-19 pandemic has so far been deep and far-reaching in India,” IHS Markit’s Hayes said.
The survey pointed to a long hard road ahead, as optimism about the next 12 months slumped to the lowest in over four years.
As of Tuesday, India had recorded over 46,000 coronavirus cases and more than 1,500 deaths. The true extent of infections, however, may be much higher in a country where millions of people do not have access to sufficient healthcare.
Although output fell sharply, panel comments indicated that a number of clients had cancelled pre-existing orders, leading to a reduction in backlogs of work. The rise in spare capacity was the strongest ever recorded in the survey history.
However, experts argue that going forward the outlook remains optimistic. “The hope is that the economy has endured the worst and things will begin to improve as lockdown measures are gradually lifted,” said Hayes.
This was echoed by other experts. “April will undoubtedly be the harshest month of the current financial year. It had the most stringent lockdown and the worst global demand conditions. Going forward, we expect the situation to ease a little,” said D.K. Joshi, chief economist at CRISIL.
But the firms themselves are less hopeful. Expectations towards future output slumped for a second successive month to their weakest since December 2015, the survey pointed out. According to the firms, expectations of a protracted decline in the economy weighed on their sentiment.
However, with input costs dropping precipitously due to the shutdown, firms were able to reduce output charges by a wide margin. The rate of deflation was a new survey record.
Earlier this week, a similar survey showed that manufacturing activity had contracted at the highest pace in over 15 years. Manufacturing PMI stood at just 27.4 in April, showing the sharpest deterioration in business conditions across the sector. With both domestic demand and export orders falling at their highest-ever paces, new businesses collapsed at a record speed and led to major job losses across the manufacturing sector in India.
The seasonally adjusted Nikkei India Composite PMI Output Index, which calculates growth after considering manufacturing and services indices relative to the size of the country’s Gross Domestic Product, sank to a new record of 7.2 in April, down from March’s 50.6, signalling a serious slowdown in overall private sector output growth.
(With inputs from Reuters and Business Standard)