Growth in India's dominant services industry came close to stalling in April as new orders slowed to a trickle, forcing companies to spend more on aggressive advertising campaigns as they fought for business, a private survey showed on Thursday.
The Nikkei/IHS Markit Services Purchasing Managers' Index slumped to a three-month low of 50.2 in April from March's 51.5, only slightly above the 50-mark that separates growth from contraction.
The new business sub-index, an indicator of both domestic and foreign demand, sank to 50.4 in April from March's 52.2, possibly also because companies raised prices at a faster pace.
A sister survey on Tuesday showed that although factory growth expanded in April at a steady pace, rises in output and employment slowed, suggesting the economy has not yet fully recovered from Prime Minister Narendra Modi's ban on high-value bank notes late last year.
Modi's decision sucked 86 percent of cash out of circulation, causing huge disruptions to daily life and business activity.
Pollyanna De Lima, an economist at survey compiler IHS Markit, said the services data highlighted how nervous some businesses remain about the economic climate after the cash crunch.
"The latest results indicate that the road to recovery from the (currency) note ban is still bumpy and is a reminder that the sector is not out of the woods yet," she said.
The services survey also pointed to growing inflationary pressures, with input costs rising for the eighth-straight month and companies passing on some of those costs to clients by raising their selling prices for the third month in a row.
Citing concerns about inflation, the central bank changed its monetary policy stance to "neutral" from "accommodative" in February and raised a secondary rate last month to absorb excess liquidity in the system.
However, with inflation still below the RBI's 4 percent medium-term target, the central bank is expected to keep rates on hold until at least the fourth quarter of 2018.
A composite PMI, which includes both manufacturing and services, fell to 51.3 last month from 52.3 in March.
(Reporting by Anu Bararia; Editing by Kim Coghill)