India’s services sector slowed to an 11-month low in December, signalling stresses that policymakers and firms can no longer treat as temporary noise. The HSBC India Services Purchasing Managers’ Index slipped to 58 from 59.8 in November, while the underlying survey pointed to weaker new business inflows and fading confidence. Growth remains expansionary. But the deceleration, coupled with a sharp drop in sentiment, deserves attention in an economy where services anchor output, jobs, and external visibility.
Services account for over half of gross value added and a rising share of employment. For three decades, they have underwritten India’s integration with global markets and cushioned shocks when manufacturing faltered. This slowdown is not yet dramatic. But it marks a pause in the sector that has carried disproportionate responsibility for growth.
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Slower orders, weaker confidence
December’s PMI reading was last seen in January 2025. The latest survey shows output growth and new work orders expanding at their slowest pace in nearly a year. More telling is the collapse in confidence. Business sentiment has fallen to its weakest level in 3.5 years, suggesting firms are planning defensively rather than waiting for a quick rebound.
Part of this caution reflects the external environment. India’s services exports are still heavily concentrated in a narrow range of activities and markets, particularly IT and IT-enabled services linked to the United States and Europe. A moderation in global technology spending, delayed corporate IT upgrades, and tighter budgets among overseas clients translate quickly into slower order pipelines at home. This exposure makes the services sector unusually sensitive to shifts in global demand, even when domestic conditions appear stable.
Competition is squeezing pricing power
At the core of the slowdown is intensifying competition. Alternate service providers—often leaner and cheaper—are crowding markets from IT services and business process outsourcing to logistics, healthcare support, and professional services. Pricing power is eroding. Passing on costs or locking in long-term contracts is becoming harder.
This competition is not only price-based. Technology is reshaping service delivery. Automation and artificial intelligence are reducing demand for routine back-office tasks, entry-level coding, customer support, and accounting functions. Platforms are standardising services that were once customised. For firms, this raises productivity but compresses margins and reduces the need for incremental hiring. What looks like cyclical pressure is, in part, structural adjustment.
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Hiring stalls under cost and credit pressure
Employment growth has nearly stalled. About 96% of surveyed firms reported no change in staff numbers from November. After months of steady hiring, companies are choosing caution over expansion.
This pause matters because services employment has increasingly shifted towards contract, gig, and lower-margin roles. Even where headcount is maintained, wage growth is slowing and job quality is deteriorating. Services-led growth has long masked these weaknesses. A slowdown brings them to the surface.
Cost pressures explain much of this restraint. Operating expenses rose faster in December, driven by higher prices for salaries, materials, and maintenance. At the same time, access to credit has tightened. Many service firms, especially MSMEs in logistics, tourism, healthcare support, and professional services, face higher borrowing costs and more conservative bank lending. Unlike manufacturing, they lack deep collateral or policy-backed credit lines. The result is balance-sheet caution even where demand has not collapsed.
Inflation is manageable—but risks are rising
Input-cost inflation remains milder than during earlier phases of the post-pandemic recovery. That offers some relief. If cost increases stay contained, firms may restrain price hikes, protect competitiveness, and resume selective hiring.
Currency movements complicate the picture. The recent weakness of the rupee has unsettled sentiment. A softer currency raises import costs for firms dependent on foreign technology and software. At the same time, it improves the competitiveness of services exports. Managing this trade-off is critical. Exchange-rate flexibility must support exports without destabilising balance sheets or reigniting inflation.
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A broader economic moderation
The services slowdown has coincided with weaker manufacturing momentum. The HSBC India Composite PMI Output Index also fell to an 11-month low in December. This points to wider economic undercurrents: cautious global demand, tighter financial conditions, and persistent geopolitical uncertainty. The moderation is economy-wide, not sector-specific.
What policy must do now
Confidence is the binding constraint. The government can help by restoring policy clarity and predictability. Frequent regulatory changes, tax uncertainty, or delays in public procurement amplify risk aversion among firms already facing competitive and technological pressures. Clear medium-term signals on reforms, trade policy, and fiscal consolidation would anchor expectations.
Urban cost pressures deserve equal attention. High rents, unreliable utilities, and rising compliance costs hurt service firms operating on thin margins. Improving ease of doing business at the city level would directly support competitiveness and employment.
Finally, services must look outward with intent. Diversifying export markets beyond a handful of advanced economies, upgrading skill profiles, and easing professional mobility can reduce vulnerability to global cycles. A weaker rupee can support this shift, but only if accompanied by stable policy and access to finance.
India’s services sector is encountering the limits of price-led growth in an uncertain world. The slowdown is manageable. But only if it is read correctly—as a signal to adapt—rather than dismissed as a passing fluctuation.
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