Services Activity Plunges To 4-Year Low Due To GST

As per a survey report, the chaos that came up with the implementation of the new indirect tax regime and new orders that saw a free fall, led the PMI or Nikkei/IHS Markit composite Purchasing Managers' Index for the July month to the lowest levels in 4 years. The PMI which measures both manufacturing as well as services sector activity stood at 46 as against 8-month high figure of 52.7 for the month of June.

The figure for the June month had been the highest for the PMI for the dominant services sector on the back of Prime Minister Narendra Modi's wake of demonetization in the November month last year.

Principal Economist at IHS Markit "PMI data for July highlight a reversal in fortunes across India, with the economy going into reverse mode after seeing a pick-up in growth momentum during June". It is the first time in six months that PMI for services sector had fallen to levels below 50 mark.

"Most of the contraction was attributed to the implementation of the goods and services tax (GST) and the confusion it caused."

The increase in prices as a result of the indirect tax regime lowered the demand for services and consequently pushed the sub-index for new business in the services sector in July month to 45.2 as against 53.3 in the month of June. Factory output also plummeted to its lowest levels in over nine years time due to confusion brought about by GST in respect of pricing and other issues.

"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", added the economist.

Nonetheless, despite the weak sentiment in the past month, participants involved in the survey remain positive of growth in services sector in the coming months which cheered the business expectation sub-index to an 11-month high.

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