India creates an index to track the service economy, such as the IIP for manufacturing | Today’s news

New Delhi: India on Tuesday unveiled a new high-frequency indicator – a trial version of the Index of Services Production (ISP) – which provides a monthly measure of activity in the country’s services sector, which accounts for more than half of its gross domestic product (GDP).

The index fills a long-standing gap in economic data for India, which for decades has had an index of industrial production (IIP) for manufacturing but no comparable high-frequency gauge for services. Together, these two indices can now provide a comprehensive picture of the state of the Indian economy.

The ISP measures changes in real services output, giving the government, the Reserve Bank of India (RBI) and financial markets a direct measure of services activity, rather than relying heavily on quarterly GDP estimates and indirect proxies such as goods and services tax (GST) collections, purchasing managers’ indices (PMIs) and bank credit.

The new indicator is significant as services have accounted for more than half of gross value added (GVA) since 2014-15 and contributed significantly to employment, exports and investment.

“India today is largely a services economy, although we continue to work towards a more balanced economic structure with a stronger manufacturing base. Starting today, for the first time, we will be able to track the country’s largest sector on a monthly basis,” Chief Economic Adviser V. Anantha Nageswaran said at a media briefing on Tuesday.

The inaugural trial, with 2024-25 as the base year, showed 14 out of 19 sub-sectors posted double-digit year-on-year growth in April, while almost all categories posted positive growth, suggesting sustained momentum in the formal services sector despite mixed signals from manufacturing and foreign trade.

“When the services sector slows down, we would like to know within weeks, rather than after the annual accounts are drawn up,” Nageswaran said. “The monthly indicator helps us distinguish between temporary fluctuations and real turning points.”

An official statement by the Ministry of Statistics and Program Implementation (MoSPI) said the trial series will be released initially to validate the methodology and get feedback from stakeholders before the index becomes part of India’s regular statistical reports.

The government plans to publish the index on the 29th of each month with a delay of about 60 days from the reference period during the trial phase before moving to a regular publishing schedule.

MoSPI Secretary Saurabh Garg said the government is developing the ISP solely on administrative data. “The ISP primarily reflects the formal sectors and we join a select few countries that have such an index.” Comparable indicators or service indices are published by Japan, China, South Korea, the US and the EU.

The trial index covers 19 sub-sectors representing about 60% of the service sector. According to Garg, work is underway to compile ISPs for sub-sectors such as health and residential care, education and home ownership based on administrative data to ensure coverage of more than 80%.

Economists welcomed the move. “The production of ISP by MoSPI is a welcome development that provides high-frequency information on the most vibrant sector of the economy,” said DK Srivastava, Senior Policy Advisor, EY India. “While coverage is about 60% of the total services sector so far, coverage is expected to increase gradually.”

Read also | Services PMI rises at slowest pace in 17 months in June as demand eases

What do the first numbers say?

Major subsectors that saw strong growth in April include accommodation and food (37.2%), retail (30.8%), administrative and support services (28.7%) and real estate (27.7%).

The conflict in West Asia, which resulted in higher oil prices, led to a 13.9% reduction in air transport services. Rail transport also fell marginally by 0.4%, while water transport and postal and courier services saw marginal growth of 5.7% and 3.3% in April.

Wholesale trade rose 15.3% year-on-year in April, while telecommunications, real estate and insurance sectors grew by 22.8%, 27.7% and 15.6% respectively.

EY’s Srivastava said the cumulative growth of the 19 services in the trial was up 20.8% year-on-year in April. “Out of these 19 sectors, eight are important sectors which account for 86.8% of these sectors covered by ISPs,” he added.

Currently, ISP covers formal services such as wholesale and retail trade, transport, banking, insurance, telecommunications, hotels and restaurants, real estate, information technology, professional services, administrative support services, and arts and entertainment.

Private health and education services will be incorporated later as more comprehensive survey data become available. The index also excludes largely non-market activities such as public administration, defence, state health and education, household services and some social services.

Read also | India’s services sector maintains growth momentum in May as output rises

How ISPs work

While the IIP measures physical output in manufacturing, mining and electricity, the ISP captures changes in real output of services, primarily using turnover as a proxy for output after adjusting for inflation.

According to Nageswaran, a notable aspect of the index is that it was created using GST revenue data. “These returns can tell us how much the formal service economy has produced without requiring businesses to fill out even a single additional form,” he added.

Every month, millions of businesses report external supplies under the GST system. These aggregate records are mapped to National Industrial Classification (NIC) codes and deflated using appropriate price indices to estimate real output.

For non-GST sectors – including parts of railways, health, education and some insurance activities – the index relies on administrative databases and the Annual Survey of Enterprises in the Incorporated Services Sector (ASISSE).

Currently, the wholesale price index (WPI) is used as the deflator for wholesale trade to construct the ISP. For other sub-sectors, either the sub-sector specific Consumer Price Index (CPI) was used, or an appropriate CPI proxy (closest available value for the sub-sector) was chosen.

The CPI-General was used as a deflator for the repair and maintenance and banking and insurance sectors. In sectors where such mapping is not available, CPI services have been used as a deflator.

Read also | Growth in India’s services sector could stall as downside risks mount

Global comparison

India’s ISP is unique globally in that it relies heavily on GST returns for real-time tracking, unlike Western models that rely on monthly business surveys.

As India has a large, hard-to-monitor informal sector, the ISP focuses exclusively on the formal economy using GST data and direct administrative records (such as railways and banking). On the other hand, the West and East Asian indices usually rely heavily on comprehensive monthly business and turnover surveys.

Countries and regions that publish ISPs include Japan, China, and South Korea. The US has a system that captures service activity quarterly. For the European Union, Eurostat publishes a comparable service producer price index and turnover indicators.