Mint Explainer | Why India is launching an index of services production

Why is India launching the ISP now?

India’s economy has steadily shifted from manufacturing to services, but there was no monthly indicator to track activity in the sector. Instead, they have relied on indirect proxies such as goods and services tax (GST) collections, purchasing managers' index (PMI) and bank credit.

The main challenge was that services are intangible and often consumed as soon as they are produced, making output difficult to measure. India also lacked high-frequency administrative datasets and suitable price indices to estimate real output.

That changed with the rollout of GST, digitization of government databases and the launch of the Annual Survey of Incorporated Services Sector Enterprises (ASISSE). Together, these have created a robust data ecosystem that makes monthly measurement of services production feasible.

The ISP is intended to complement the IIP by providing high-frequency information on the services economy, enabling better policy decisions and economic forecasting.

“A reliable indicator of production of services would fill up a critical information gap in understanding the profile of ongoing economic activities of the economy on a high frequency basis,” said D.K. Srivastava, chief policy advisor, EY India.

“The importance of services sector in the Indian economy is well recognised in terms of its contribution to the overall output and growth. Such an index will be highly useful for understanding the variation in the ongoing economic activities and for short-term forecasting as also in estimating the quarterly services sector GVA,” Srivastava added.

What exactly will the index measure?

The ISP is a volume index that measures changes in the real output of service-producing industries rather than in revenues.

With 2024-25 as the base year, it will initially cover the formal services sector, including wholesale and retail trade, transport, banking, insurance, telecommunications, hotels and restaurants, real estate, information technology, professional services, administrative support services and arts and entertainment.

Health and education services provided by private institutions will be incorporated later using data from ASISSE.

The Technical Advisory Committee (TAC) has recommended compiling the index at the 2-digit NIC 2025 level using a Laspeyres volume index and GVA-based weights, ensuring sectors with larger economic contributions receive greater weight.

Initially, MoSPI will publish both the overall index and sectoral indices on a trial basis before launching the regular series.

How will the ISP be compiled?

The biggest innovation is the use of GST data. Every month, millions of businesses report outward supplies through GST returns. Since services are generally produced and consumed simultaneously, these outward supplies closely reflect production. MoSPI will use only aggregated GST data, not individual taxpayer information.

GST service categories are mapped to national industrial classification (NIC) codes, after which turnover is adjusted for inflation to estimate real output.

For services exempt from GST—such as parts of railways, health, education and some insurance services—the ISP will rely on administrative datasets from government agencies and ASISSE.

This combination of GST records, administrative databases and surveys makes the ISP one of India’s most comprehensive high-frequency economic indicators.

How is the ISP different from the IIP?

The IIP measures production in manufacturing, mining and electricity using physical quantities. Services, however, cannot usually be measured in units or tonnes.

Instead, the ISP primarily uses turnover as a proxy for production because services typically do not involve inventory accumulation.

To remove the impact of inflation, turnover is converted into real output using price deflators. These include the wholesale price index for wholesale trade, sector-specific consumer price index where available, general CPI for banking and insurance and CPI (non-food) for several other services.

Although international practice prefers service producer price indices (SPPIs), India currently has limited SPPI coverage, making CPI-based deflators the practical alternative.

Which services are covered—and which are not?

The ISP primarily captures the formal services sector, reflecting the activity of GST-registered enterprises.

It covers most market-based services but excludes sectors dominated by government or non-market activities, including public administration and defence, government health and education, household services, social work, gambling and some financial services outside banking and insurance.

Private health and education services will be added later after sufficient ASISSE data becomes available.

Why does the ISP matter?

The ISP is expected to become one of India’s most important macroeconomic indicators.

For the Reserve Bank of India and the finance ministry, it will provide an early reading of changes in the country’s largest economic sector instead of waiting for quarterly GDP estimates. Businesses and investors will gain another high-frequency indicator alongside inflation, GST collections and the IIP, improving demand forecasting and business-cycle analysis.

The government will initially release the index on a trial basis, with monthly publication around 60 days after the reference month, to validate the methodology and gather stakeholder feedback before introducing a regular series.

As services continue to account for more than half of India’s economy, the ISP is expected to become the missing counterpart to the IIP, providing policymakers and markets with a more complete and timely picture of economic activity while bringing India’s statistical system closer to global best practices.