India's service sector started the new year on a strong note as activity accelerated to seven-year high in January, raising hopes of an economic recovery, a private survey showed on Wednesday. With surging demand and rise in output, job creation was sustained and business optimism was also maintained, the report said.

The IHS Markit India Services Business Activity Index increased to 55.5 in January compared to 53.3 in December, signalled the strongest upturn since January 2013, IHS Markit said in its report. A reading above 50-mark indicates growth, while one below it reflects contraction. This was the first month of expansion for Services PMI after three straight month of contraction. It was attributed to favourable market conditions and better underlying demand, according to survey participants.

January data showed that growth of private sector activity moved up a gear, amid broad-based accelerations across manufacturing and services. The main factor boosting growth was a sudden wave of new business. Aggregate sales rose at the sharpest pace since January 2013, with quicker increases evident at goods producers and service providers.

"With new business growth ticking higher, services companies continued to add to their workforces. The rate of job creation was little-changed from December, thereby remaining above its long-run average," IHS Markit said in its report.

Meanwhile, rates of input cost and output charge inflation in the private sector accelerated to 66- and 30-month highs, respectively.

Amid reports of higher prices for beauty products, food, freight, fuel and maintenance, services firms' expenses increased further during January. The overall rate of cost inflation was sharp and the fastest in close to seven years, as per the report.

The consumer services category recorded by far the steepest increase in input costs, but charge inflation was most pronounced among transport and storage companies.

The data signalled that new orders were mainly generated domestically, as exports decreased at the start of the year. The fall ended a ten-month sequence of expansion, but was only slight. A number of panellists mentioned weaker demand from China, Europe and the US, the report said.

Commenting on the latest survey results, Pollyanna de Lima, Principal Economist at IHS Markit, said: "With business revenues rising, service providers continued to increase capacity to meet further strong growth in sales. This is good news for jobseekers, particularly when we consider the results from the manufacturing industry which showed the steepest upturn in employment since August 2012."

Lima said that one worrying development, however, was the trend for inflation. The service survey pointed to the sharpest increase in input prices in just under seven years, with companies mostly absorbing the added cost burdens themselves instead of fully passing these on to their customers. "This may translate into quicker increases in selling prices in months to come, which may curb sales. Firms could also choose to restrict hiring in order to protect profit margins," Lima added.

Looking forward, Indian services firms expect further improvements in demand, advertising and the approval of pending projects to support growth of business activity over the coming twelve months.

By Chitranjan Kumar

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