The IHS Markit India Services Business Activity Index dropped to 52.3 in December from 53.7 in November.
A reading above 50 indicates expansion while below that signals contraction.
Global Covid-19 restrictions, particularly travel bans restricted international demand for Indian services at the end of 2020. New export business decreased sharply, but at the slowest pace since March, according to the survey. December saw the ninth round of job shedding in ten months.
“Although the news that the service sector remained in expansion mode during December is welcome, the fact that growth lost momentum yet again shouldn’t be disregarded,” said Pollyanna De Lima, Economics Associate Director at IHS Markit.
The slowdown is particularly notable given the size of the sector and the fact that the recovery only began in October.
Highlighting the “damaging impact of the pandemic on the service economy”, De Lima said that a spike in Covid-19 cases was reported as a key factor restricting growth of new work intakes among service providers, which in turn curbed the rise in output and led to increased business uncertainty about the outlook.
Sub-sector data highlighted Transport & Storage, Consumer Services and Finance & Insurance as the brightest spots, where sales and output expanded in December. Contractions were noted in Information & Communication and Real Estate & Business Services.
A sister survey on Monday showed manufacturing activity strengthening in December with the Manufacturing Purchasing Managers’ Index recording a reading of 56.4, a higher than November’s reading of 56.3.
Overall, the upturn in private sector activity eased to a three-month low in December with the Composite PMI Output Index falling to 54.9 from 56.3 in November coupled with a decline in private sector employment.
“It is clear that the early part of 2021 will continue to be challenging, but we’re looking at a sustainable recovery and some return to normality once Covid-19 vaccines become available,” De Lima added.
As for the outlook, the survey revealed that though companies maintained an upbeat view that output will increase in 2021, the overall level of positive sentiment fell from November. Anecdotal evidence suggested that optimism was curbed by uncertainty surrounding the Covid-19 pandemic, rupee depreciation and inflationary pressures.