Measuring services: New index for formal sector will fill a critical gap

The National Statistics Office’s (NSO’s) proposal to introduce an index of service production (ISP) for the formal sector, with 2024-25 as the base year, is a significant step forward. Services contribute over half the gross value added (GVA) in India. The ISP, built primarily on goods and services tax (GST) data, will provide monthly data to capture short-term movements in services-sector activity, much like the index of industrial production (IIP) does for the manufacturing sector. Along with revision in other indices, it signals a broader attempt by the Ministry of Statistics and Programme Implementation (MoSPI) to modernise India’s statistical architecture.

 

The Organisation for Economic Co-operation and Development manual and the Eurostat’s guide have recommended services-production indices based on turnover, volumes, or input indicators, with turnover-based measures deflated by appropriate price indices as the preferred approach. Advanced economies such as the United Kingdom publish a monthly services index, which feeds directly into their monthly gross domestic product (GDP) estimates while South Korea releases a services-industry activity index using value-based indicators adjusted by sector-specific producer prices. The European Union too compiles monthly services-production indices across member states. India’s ISP proposal broadly aligns with these international practices, particularly in its reliance on administrative data and value-based indicators.

 

However, measuring the services sector remains inherently difficult owing to its diverse and fragmented nature. As the approach paper notes, reliable high-frequency data is lacking for major segments such as real estate, professional services, and retail trade. Even where the data exists — such as in banking, insurance, railways, or telecom — their combined share is less than one-fifth of services output, limiting their usefulness in constructing a comprehensive index. More significantly, the informal sector, accounting for nearly one-third of the GVA in services, remains outside its scope due to persistent data gaps.

 

Since services production is closely tied to sales, GST “outward supplies” can serve as a proxy for output. However, a more fundamental challenge lies in price measurement. International guidelines clearly favour producer price indices (PPIs) as deflators for converting nominal turnover into real output. India, however, does not yet have a comprehensive index. In its absence, the approach paper proposes using a mix of sector-specific consumer price indices (CPIs), a non-food consumer price index, and other proxies. This makes the development of a production price index indispensable. The ongoing effort to design such an index will, therefore, be a crucial complement to the ISP. A robust index would not only improve the accuracy of the ISP but also address long-standing concerns about deflation in GDP, where reliance on the wholesale price index (WPI) is seen as inadequate.  The ISP’s initial release will be “trial index”, given the significant data and methodological gaps. The priority now must be to expand coverage, refine deflators, and integrate informal-sector proxies. With improvement, the ISP can evolve into a credible and essential tool for real-time economic assessment.