GST’s twin effect: Here’s why services sector slumped and manufacturing hit 13-month high

Published On: 05, Dec 2017 | Source:

Five months into the Goods and Services Tax (GST) and its effect on various sectors have been giving mixed signals. The manufacturing sector in November recorded the strongest improvement in business activity in 13 months as new orders picked up supported by the reduction in GST rates and strong demand conditions, while, at the same time, the services activity slipped due sluggish demand and lower customer turnout, monthly PMI survey showed.

“Business under performance emanated from July’s Goods and Services Tax (GST) which contributed to sluggish demand and lower customer turnout (for services), according to anecdotal evidence,” said Aashna Dodhia Economist at IHS Markit and author of the report. On the contrary, reductions in GST rates and stronger underlying demand conditions led to robust growth in November.

The services sector activity fell from 51.3 in October to a three-month low of 50.3 in November, while manufacturing rose from 50.3 in October to 52.6.

Nikkei Composite Output Index maps the economic health of the manufacturing and services sector on a monthly basis. The indicator’s 50 mark separates expansion from contraction. Any country going beyond the 50 mark shows an expansion in manufacturing activities and below 50 mark shows contraction.

On the prices front, input cost inflation quickened to the fastest since October 2013 and accordingly service providers increased their average selling prices in November. “That said, cost pressures further intensified at service firms (fastest inflation since October 2013), which could constrain output growth in the near term and reduce any central bank appetite to reduce interest rates,” Dodhia said, however, it did not have much impact on the manufacturing sector despite firms not being able to fully pass on higher cost burdens.

India Inc, however, is demanding interest rate cut to further build on positive sentiment generated by the rebound and upgrade of the country’s sovereign rating by Moody’s. In its October review, it had kept the benchmark interest rate unchanged on fears of rising inflation while lowering growth forecast to 6.7 % for the current fiscal.