Services “outperformance” unlikely to last

In contrast to many other economies, the 20% y/y slump in India’s services sector in Q2 was less pronounced than that in industry, which collapsed by almost 40% y/y. But we doubt that the “outperformance” of the services sector will last. Containment measures have been scaled back to enable a resumption in activity, but this has mainly been focussed on areas where it is relatively easy to maintain physical distancing, such as manufacturing. In contrast, restrictions remain very tight in services sectors where social interaction is more of a necessity such as as hotels, recreation and aviation. Indeed, domestic airline passenger numbers remain down by 80% y/y in August. More broadly, the services PMI reading is stuck at a much lower level than its manufacturing counterpart. And with new virus cases showing precious few signs of abating, these restrictions are likely to remain in place for a long while yet. As such, the services sector will underperform other areas of the economy over the coming quarters.