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Business survey presented on Tuesday showed that activity in India’s service sector dropped in November as the new tax regime took a toll on both its foreign and domestic demand.

According to the data, India services PMI business activity index declined from 51.7 in October to 48.5 last month, signaling a contraction for first time in three months as it falls below the 50 mark.

A reading above 50 suggests economic expansion, while a reading below 50 indicates contraction.

A composite PMI, which includes both manufacturing and services activity, also plummeted to 50.3, against 51.3 in October.

Back in November of last year, services PMI was at 49.1, indicating that the current slowdown was in moderate territory.

Still, even with poor demand conditions, service providers was still able to keep on increasing their workforce, given that the level of business sentiment in that sector for the next 12 months grew to its strongest pace since July.

GST Weighs on India’s Business PerformanceFSMNews

Economist Aashna Dodhia said that the possibility of a continuous recovery in November lessened as market growth in the manufacturing sector was largely offset by a slump in the service segment, adding that business underperformance stemmed from the Good and Services Tax (GST).         

The new GST, which was implemented from July 2017, was the main contributing factor to a slow demand as well as lower customer numbers during the month of November.    

The GST council recently adjusted the rates on a number of goods, including restaurants, cutting rates on AC and non-AC restaurants from its previous 18 percent to 5 percent.  

Although companies are now better adapted to the national sales tax, it has weighed on demand which was still recovering from the government’s currency tightening last year.

Underlying data also showed that service performance shrank as new business dropped last month. New business sub-index, an alternative for both foreign and local demand, dropped to 48.3 in November from 51.5 in October.

Cost Pressures Could Ease RBI’s Appetite to Reduce Rates

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On the prices front, input cost inflation accelerated to its fastest pace since October 2013, and as a result, service providers boosted their average selling costs in November.

That said, Dodhia stated that growing cost pressures could hinder output growth in the near term and ease any central bank appetite to reduce interest rates.

Annual consumer inflation was at a seven-month high of 3.58 percent in October and it is likely to hit the Reserve Bank of India’s (RBI) 4 percent target in the upcoming months.

However, seeing that India’s economy has showed signs of recovery in the three months ending in September might suggest that the RBI is not likely to adjust rates anytime soon.

The bank decided to retain its benchmark interest rates on concerns over a rising inflation, while lowering growth estimates to 6.7 percent. RBI has lessened its lending rate by 0.25 points to 6 percent in August, bringing it to a 6-year low.   

Analysts expect that the central bank will keep interest rates unchanged at its December policy meeting and all throughout the end of 2018.

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