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India
Growflation: HSBC services PMI up in February
The strong growth momentum in the services sector continued into February and accelerated, with both business
activity and new business coming in stronger. Optimism about the outlook also improved. Input costs and prices
charged are trending up, but the pace of acceleration eased in February. However, the input price increase was still the
second highest over the past 31 months, underscoring the prevalence of strong underlying inflation pressures and the
need for RBI to continue the tightening cycle.
Facts
According to HSBC's India PMI, the expansion in service sector activity picked up pace in February (60.2 vs. 58.1 in January),
which lifted the composite index for both service and manufacturing activity (61 vs. 59.6 in January). Moreover, new service
sector business accelerated (59.6 vs. 57.4 in January).
Despite the rapid pace of expansion, backlogs of work were broadly unchanged (50.2 vs. 50.7 in January), contained by
continued hiring (52 vs. 52.1 in January).
However, the fast pace of growth is pushing up input prices (59.5 vs. 62 in January) led by higher staff, food, and fuel prices,
albeit at a slower pace. However, the rate of increase was still the second highest in 31 months, after the big bounce in January.
The uptrend in input prices is lifting prices charged (54.4 vs. 55.3 in January), although sequential inflation decelerated
slightly.
Looking ahead, businesses are very optimistic about the outlook for the next 12 months, resulting in a jump in the business
expectations barometer (76.7 vs. 72.3 in January).
Interpretation
The acceleration in service sector and manufacturing growth is a sign that India's economy is far from running out of steam.
However, as pointed out before, the current level of speed is not consistent with a "comfortable" rate of inflation.
With activity running this quick and new orders streaming in, everybody have to run a bit faster and staffing levels have to
increase. That means paying more overtime and raising wages to attract staff. Higher food prices are also adding to costs,
especially in restaurants and other food-related services. Rising international oil prices, recently ascending steeply because of
unrest in the Middle-East, are adding to input cost pressures and could not have come at a worse time. Of course consumers are
partly shielded against higher oil prices due to subsidy programs, but many businesses are not.
All of this underscores the urgency of continuing the monetary policy tightening cycle. We are not arguing that the RBI should
respond to supply factors, but the elevated food prices, as pointed out before, also reflect cyclically strong demand conditions.
Moreover, if food and oil prices stay elevated for an extended period, now increasingly likely, we will see more second-order
impact on inflation through higher wage demands, a lift in inflation expectations, etc. In fact, there are increasing signs that
this is already taking place. This is when supply side factors become relevant for a central bank's policy stance.
Now, if international oil prices were to rise very significantly and threaten the recovery in the US and other advanced
economies, this could be a game changer for global growth. If India faced such a scenario, the risks to growth through
dwindling confidence (domestic and international) could outweigh the risks to inflation, calling for a change in RBI's policy
stance. However, we are currently at quite a distance from this risk scenario and inflation risks at this stage still dominate
growth risks in India's case.
Also, RBI has to carry most of the tightening burden. While the FY 2012 budget was tight on paper, we do not think the 4.6%
of GDP deficit target for the central government is realistic. The actual deficit will turn out higher as revenues disappoint and
extra-budgetary expenditure demands are presented later in the year. This means less fiscal tightening than planned.
Bottom line: February PMI readings underscored that inflation risks dominate growth risks, calling for more monetary policy
tightening.
Leif Lybecker Eskesen, Chief Economist for India & ASEAN
Prithviraj Srinivas, Economics Associate
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India
Growflation: HSBC services PMI up in February
The strong growth momentum in the services sector continued into February and accelerated, with both business
activity and new business coming in stronger. Optimism about the outlook also improved. Input costs and prices
charged are trending up, but the pace of acceleration eased in February. However, the input price increase was still the
second highest over the past 31 months, underscoring the prevalence of strong underlying inflation pressures and the
need for RBI to continue the tightening cycle.
Facts
According to HSBC's India PMI, the expansion in service sector activity picked up pace in February (60.2 vs. 58.1 in January),
which lifted the composite index for both service and manufacturing activity (61 vs. 59.6 in January). Moreover, new service
sector business accelerated (59.6 vs. 57.4 in January).
Despite the rapid pace of expansion, backlogs of work were broadly unchanged (50.2 vs. 50.7 in January), contained by
continued hiring (52 vs. 52.1 in January).
However, the fast pace of growth is pushing up input prices (59.5 vs. 62 in January) led by higher staff, food, and fuel prices,
albeit at a slower pace. However, the rate of increase was still the second highest in 31 months, after the big bounce in January.
The uptrend in input prices is lifting prices charged (54.4 vs. 55.3 in January), although sequential inflation decelerated
slightly.
Looking ahead, businesses are very optimistic about the outlook for the next 12 months, resulting in a jump in the business
expectations barometer (76.7 vs. 72.3 in January).
Interpretation
The acceleration in service sector and manufacturing growth is a sign that India's economy is far from running out of steam.
However, as pointed out before, the current level of speed is not consistent with a "comfortable" rate of inflation.
With activity running this quick and new orders streaming in, everybody have to run a bit faster and staffing levels have to
increase. That means paying more overtime and raising wages to attract staff. Higher food prices are also adding to costs,
especially in restaurants and other food-related services. Rising international oil prices, recently ascending steeply because of
unrest in the Middle-East, are adding to input cost pressures and could not have come at a worse time. Of course consumers are
partly shielded against higher oil prices due to subsidy programs, but many businesses are not.
All of this underscores the urgency of continuing the monetary policy tightening cycle. We are not arguing that the RBI should
respond to supply factors, but the elevated food prices, as pointed out before, also reflect cyclically strong demand conditions.
Moreover, if food and oil prices stay elevated for an extended period, now increasingly likely, we will see more second-order
impact on inflation through higher wage demands, a lift in inflation expectations, etc. In fact, there are increasing signs that
this is already taking place. This is when supply side factors become relevant for a central bank's policy stance.
Now, if international oil prices were to rise very significantly and threaten the recovery in the US and other advanced
economies, this could be a game changer for global growth. If India faced such a scenario, the risks to growth through
dwindling confidence (domestic and international) could outweigh the risks to inflation, calling for a change in RBI's policy
stance. However, we are currently at quite a distance from this risk scenario and inflation risks at this stage still dominate
growth risks in India's case.
Also, RBI has to carry most of the tightening burden. While the FY 2012 budget was tight on paper, we do not think the 4.6%
of GDP deficit target for the central government is realistic. The actual deficit will turn out higher as revenues disappoint and
extra-budgetary expenditure demands are presented later in the year. This means less fiscal tightening than planned.
Bottom line: February PMI readings underscored that inflation risks dominate growth risks, calling for more monetary policy
tightening.
Leif Lybecker Eskesen, Chief Economist for India & ASEAN
Prithviraj Srinivas, Economics Associate
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