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Business Confidence At 7-Year Low, Survey Shows

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Activity in India's services sector expanded at its fastest rate in five months in November, driven by surging new orders as firms cut prices on tumbling raw material costs,  but business confidence slumped to a more than seven-year low, according to a survey.

The HSBC Services Purchasing Managers' Index (PMI), compiled by Markit, rose to 52.6 in November. Growth in October had stalled at 50, the level that demarcates growth from contraction.

"Despite the uptick in order flows, business sentiment deteriorated, reminding us that continued policy action that addresses investor concerns is needed to sustain growth momentum," said Pranjul Bhandari, chief India economist at HSBC.

Business sentiment is much lower than the readings in March and April when opinion polls had started talking about a Modi wave ahead of the parliamentary elections. Business confidence may have eroded due to the impatience of businessmen with the slow progress of reforms.  Further,  the slowdown in Indian economic growth to 5.3 per cent in the third quarter of 2014 and the reluctance of the Reserve Bank of India to cut rates, may have contributed to the business sentiment.

The central bank’s monetary policy statement had also noted that domestic “activity is likely to be muted in Q3 (fiscal third quarter), also because of a moderate kharif harvest.”

The new business sub-index accelerated to 52.5 in November, its highest since July, signaling improving demand as firms cut prices for the first time in over four years.

A sharp fall in global crude oil prices coupled with softer food costs lowered consumer inflation in India to 5.52 percent in October.

The survey showed input costs for services firms fell for the first time in over five years in November.

The Reserve Bank of India kept key interest rates unchanged on Tuesday but hinted at a possible cut early next year if inflation remained subdued and the government controlled the fiscal deficit.

The government has identified key areas for reform, such as raising foreign investment caps on various sectors and reducing subsidies, although most of those plans have yet to be implemented.