India's economy just hit the wall after the introduction of a new goods and services tax

Photo by Bill Pugliano/Getty Images

Operating conditions across India’s services sector deteriorated sharply last month following the implementation of the nation’s first goods and services tax (GST) on July 1.

The Nikkei-IHS Markit India Services Purchasing Manager’s Index (PMI) plunged from 53.1 to 45.9, leaving it at the lowest level since September 2013.

PMIs measure changes in activity levels across a particular sector from one month to the next. Anything above 50 signals that activity levels are improving while a reading below suggests they’re deteriorating. The distance away from 50 indicates how quickly activity levels are expanding or contracting.

A movement from positive territory to below 50 this sharp is highly unusual in PMI data.

The reading of 45.9 indicates that not only did activity levels across India’s services sector deteriorate, they did so at the fastest pace in nearly four years.

The result mirrored that in the separate Nikkei-IHS Markit India manufacturing PMI which fell to 47.9, down from 50.9 in June.

Source: Thomson Reuters

“Output and new work declined for the first time since January, with rates of reduction the quickest since September 2013. This had an adverse effect on the labour market, with employment contracting over the month,” said IHS Markit.

“The launch of the GST was mentioned by services firms as having caused a contraction in new work, leading to lower activity. The drop in new business inflows echoed the trend for output, being the first since January and the most pronounced in nearly four years.”


Despite the ugly July report card, it’s clear that firms aren’t overly concerned that the weakness will last with confidence levels looking 12 months ahead rising to the highest level since August 2016.

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