Industry

Services PMI shows firms cutting prices to boost demand

For the month of October, however, the input price indices rose by more than output price indices for both manufacturing and services firms. If this trend holds, it will squeeze corporate margins. Photo: Hemant Mishra/Mint

For the month of October, however, the input price indices rose by more than output price indices for both manufacturing and services firms. If this trend holds, it will squeeze corporate margins. Photo: Hemant Mishra/Mint

The Nikkei India Services PMI for October came in at an eight-month high. One reason for the improvement was more discounts offered by firms, which helped demand to pick up. The PMI report says, “As part of efforts to secure more work, service providers in India lowered their tariffs (on average) in October.” Prices charged by services firms fell for the second successive month in October, with the output price index at 49.5 in September and 49.6 in October. A reading below 50 indicates a contraction, while one above 50 shows an expansion.

Similarly, while the output price index for the manufacturing PMI showed a rise in October, it had fallen in August and September. The PMI report said, “Ending a two-month sequence of decreases, prices charged by Indian manufacturers were raised in October.” The overall PMI number for manufacturing in October, in stark contrast to the services PMI, came in at a 22-month low.

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That suggests:

1) There’s a whiff of deflation in the air for both manufacturing and services firms.

2) We have a two-speed economy, with the manufacturing struggling while the services sector is showing a recovery.

3) It is plausible that price cuts are driving demand, which is why the services sector PMI did well in October, while the manufacturing sector struggled. Financial earnings also show that companies have cut prices and offered discounts because demand is weak.

Thankfully, input prices too have been soft. The PMI numbers show that input prices in general have increased by more than output prices this year, but there have been some exceptions. For October, however, the input price indices rose by more than output price indices for both manufacturing and services firms. If this trend holds, it will squeeze corporate margins.
[“source -livemint”]

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