With a vaccine now available and covid-19 restrictions easing, India’s services sector is slowly finding its feet in a post pandemic world. The seasonally adjusted India Services Business Activity Index rose from 52.3 in December to 52.8 in January, pointing to a quicker expansion in output, showed IHS Market’s latest Purchasing Managers’ Index (PMI) survey. A reading above 50 indicates expansion and below the threshold points to contraction.

For now, domestic demand continues to be the driver of this recovery, however, services providers are optimistic about increased output in the coming 12 months. The survey report said that the positive sentiment was supported by beliefs that the roll-out of covid-19 vaccines would underpin demand growth and improvements in the wider economy. The overall degree of optimism was at an 11-month high, it added.

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On the flipside, input costs increased for the seventh straight month at the start of 2021, with monitored companies reporting higher prices for fuel and a wide range of materials. Although weaker than in December, the rate of cost inflation was marked in the context of historical data, said the survey.

“The main area of concern is the extent to which costs are rising across the services economy, with the rate of inflation remaining above trend despite easing from December,” said Pollyanna De Lima, economics associate director at IHS Markit.

With reviving demand, economists expect services providers to pass the burden of increased costs to customers.

Cautioning services inflation, economists at HSBC Securities and Capital Markets (India) Pvt. Ltd pointed out that pent-up demand often comes as a wave, not a dribble, and there could be some adjustment costs involved.

“Service providers tend to raise prices once a year. This was not possible in 2020. They may raise prices for two years together in 2021. Large firms and high earners have done well through the pandemic. They have a wall of savings that they are now spending. Consumption patterns show that those at the top of the pyramid consume more services than goods. And that could be inflationary,” it said in a report on 25 January.

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