Strong Domestic Demand Drives Growth
The services PMI, which tracks business activity across industries including finance, retail, transport, and hospitality, signaled a significant strengthening in market conditions. Firms reported strong inflows of new work, particularly from domestic clients, highlighting the resilience of consumer demand even amid global uncertainties. Export orders also saw modest growth, although weaker compared to domestic demand.
Economists note that this expansion reflects rising consumption in urban centers and greater investment activity. Official data released last week showed India’s services sector expanding by 7.8% in the previous quarter, exceeding expectations and providing a boost to overall GDP.
Inflation Concerns Emerge
While growth momentum is encouraging, the PMI survey flagged rising inflationary pressures. Service providers raised prices at the sharpest pace since 2011, citing higher input costs, particularly wages and raw materials. This could test the Reserve Bank of India’s (RBI) inflation management strategy, as consumer price growth has already been running above its 4% target in recent months.
“The strong demand environment has given firms the confidence to pass on higher costs to customers, but this also means inflationary risks remain elevated,” analysts at HSBC noted.
Impact of Global Trade Tensions
The services sector’s robust performance comes against the backdrop of rising global trade frictions. The recent decision by the Trump administration to impose steep 50% tariffs on Indian goods exported to the United States is expected to weigh on growth in the coming quarters. While India’s services sector is less directly exposed to goods tariffs, analysts warn of potential spillover effects on IT, logistics, and related service industries.
India’s Ministry of Commerce has already indicated it will explore diplomatic channels to resolve trade frictions. However, experts caution that weaker external demand could slow the pace of expansion in the second half of the financial year. (PIB)
Outlook for the Rest of 2025
Despite concerns, business confidence remains upbeat. Most firms surveyed by S&P Global expect demand to stay strong in the months ahead, supported by festive season spending and government-led infrastructure investments. However, persistent inflation, high borrowing costs, and global trade challenges remain key risks.
India’s services sector accounts for over 50% of the country’s GDP and is a major driver of employment. Its continued expansion will be crucial for sustaining overall economic momentum as the manufacturing sector faces headwinds from slowing exports and rising input costs.
