Survey data indicated that while activity continued to expand, the momentum seen earlier in the year showed signs of moderation as 2026 began.

The Services Purchasing Managers’ Index remained firmly in expansionary territory, signaling resilience, but the decline highlighted emerging headwinds.

A key factor behind the slowdown was weaker growth in new business, which recorded its slowest pace in almost a year.

Service providers reported that although client interest remained positive, competitive pressures intensified across several segments.

Companies noted increasing competition from alternative service providers offering lower-cost solutions, limiting the pace of new order inflows.

The employment landscape also softened, marking a notable shift after more than three years of continuous hiring expansion.

In December, firms largely froze recruitment, with a marginal reduction in staffing levels reported across the sector.

An overwhelming majority of surveyed firms chose to maintain existing workforce strength rather than expand payrolls.

This pause in hiring reflects a more cautious outlook as companies reassess demand conditions and cost structures.

Business sentiment regarding future activity weakened for the third straight month, reaching its lowest level in over three years.

Despite the dip, optimism has not disappeared entirely, with firms still expecting growth, albeit at a more measured pace.

External demand offered a positive counterbalance, as new export orders strengthened after slowing in previous months.

This uptick suggests that global demand for Indian services remains supportive, particularly in technology and business services.

On the cost side, input price pressures increased moderately compared to November but stayed below long-term averages.

Firms cited higher operational and material costs, though these increases were not considered disruptive.

Output price inflation remained muted, with only a small fraction of companies raising their service fees.

This restrained pricing environment reflects intense competition and a desire to protect market share.

Low inflationary pressure may benefit consumers and clients by keeping service costs stable in the near term.

Economists suggest that manageable cost increases could help firms remain competitive and support gradual demand recovery.

The broader economic picture mirrored this trend, with combined services and manufacturing activity also easing.

Manufacturing growth slowed to its weakest pace in two years, contributing to a softer overall business activity reading.

Nevertheless, the composite index remained well above contraction levels, underlining continued economic expansion.

India’s services sector remains a critical pillar of the economy, accounting for a significant share of output and employment.

Even with the slowdown, activity levels remain historically strong compared to global peers.

Analysts caution that the moderation may reflect a normalization after prolonged post-pandemic growth rather than a sharp downturn.

Policy stability, steady domestic consumption, and improving global conditions could help support services growth ahead.

Export-oriented services, in particular, may benefit from stronger overseas demand as global markets stabilize.

The coming months will be crucial in determining whether December’s slowdown is temporary or the start of a broader trend.

For now, the data points to a resilient sector navigating a phase of adjustment rather than contraction.

The Asian Development Outlook (ADO) September 2025 report noted that GDP growth was strong in the first quarter of FY26, driven by robust domestic consumption and government spending, but rising US tariffs on exports are expected to moderate growth in the second half of the year and into FY27. Despite these challenges, net exports are expected to subtract only moderately from growth, supported by resilient service exports and increasing trade with other countries.

The report also highlighted that India’s fiscal deficit may exceed the budgeted 4.4% of GDP, partly due to slower tax revenue growth following recent GST adjustments. However, government spending has remained on track, with capital expenditure up 32.8% and current expenditure rising 17.1%. Subsidies overall fell 9.6%, while targeted increases, such as a 36.9% rise in fertiliser subsidies, aim to support agriculture.

The Reserve Bank of India (RBI) has taken measures to support growth, including lowering the repo rate to 5.5%—the lowest since August 2022—and reducing the cash reserve ratio by 100 basis points. These steps have led to lower lending rates on new rupee loans and decreased yields on 10-year government securities, promoting liquidity and investment.

Inflation is expected to remain moderate at 3.1% in FY26, with core inflation close to 4%. FY27 may see a slight increase in food price-driven inflation, but overall price stability is expected to continue.

India’s current account deficit is projected to widen modestly from 0.6% in FY25 to 0.9% in FY26 and 1.1% in FY27. Lower net petroleum imports, strong service exports, and remittances are expected to help maintain a stable external position. International reserves are anticipated to remain robust despite global uncertainties.

While foreign direct investment (FDI) inflows remain subdued amid trade volatility, the report emphasized strong domestic demand, supportive fiscal and monetary policies, and a resilient services sector as key factors sustaining economic growth.