India creates an index to track the services economy, like IIP for manufacturing

New Delhi: India on Tuesday unveiled a new high-frequency indicator — a trial release of the Index of Services Production (ISP) — to provide 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 India’s economic data, which has had the Index of Industrial Production (IIP) for industry for decades, but no comparable high-frequency indicator for services. Together, these two indices can now provide a comprehensive picture of the state of India’s economy.

The ISP measures changes in the real output of services, giving the government, the Reserve Bank of India (RBI) and financial markets a direct gauge of services activity instead of relying largely 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 have contributed significantly to employment, exports and investment.

“India is today predominantly a services economy, even as we continue working towards a more balanced economic structure with a stronger manufacturing base. From today onwards, we will, for the first time, be able to observe 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 release, with 2024-25 as the base year, showed that 14 of the 19 sub-sectors recorded double-digit year-on-year growth in April, while nearly all categories posted positive growth, indicating sustained momentum in the formal services sector despite mixed signals from manufacturing and external trade.

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

An official statement by the ministry of statistics and programme implementation (MoSPI) said the trial series would initially be released to validate the methodology and obtain stakeholder feedback before the index becomes part of India’s regular statistical releases.

The government plans to publish the index on the 29th of every month with a lag of about 60 days from the reference period during the trial phase before transitioning to a regular release schedule.

MoSPI secretary Saurabh Garg said the government is developing ISP entirely on administrative data. “ISP primarily reflects formal sectors and with this, we joined a select few countries who have such an index.” Comparable services indicators or indices are published by Japan, China, South Korea, the US, and the EU.

The trial index covers 19 sub-sectors accounting for about 60% of the services industry. According to Garg, work is in progress to compile ISP for sub-sectors like health and residential care, education, and ownership of dwellings based on administrative data to ensure coverage of more than 80%.

Economists welcomed the move. “The production of ISP by the MoSPI is a welcome development providing high frequency information regarding the most vibrant sector of the economy,” said D.K. Srivastava, chief policy advisor at EY India. “While the coverage is so far about 60% of the total services sector, it is expected that the coverage will progressively increase.”

What the first numbers say

Top sub-sectors reporting strong growth in April include accommodation and food (37.2%), retail trade (30.8%), administrative and support services (28.7%) and real estate (27.7%).

The West Asia conflict, resulting in higher crude prices, led to a contraction of 13.9% in air transport services. Railway transport also contracted marginally by 0.4% while water transport and postal and courier services registered marginal growth at 5.7% and 3.3%, respectively, in April.

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

EY’s Srivastava said the cumulative growth of the 19 services in the trial release shows year-on-year growth in April of 20.8%. “Out of these 19 sectors, there are eight important sectors accounting for 86.8% of these sectors covered under ISP,” he added.

Currently, the 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, government health and education, household services and certain social services.

How the ISP works

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

According to Nageswaran, the remarkable aspect of the index is that it has been built using GST return data. “Those returns can tell us how much the formal services economy has produced without asking businesses to fill out even a single additional form,” he added.

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

For sectors outside the GST framework—including parts of railways, health, education and certain insurance activities—the index relies on administrative databases and the Annual Survey of Incorporated Services Sector Enterprises (ASISSE).

At present, for compiling ISP, the wholesale price index (WPI) is used as a deflator for wholesale trade. For other sub-sectors, either sub-sector specific consumer price index (CPI) has been used or suitable proxy CPI (closest match for the sub-sector available) has been chosen.

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

Global comparison

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

Since India has a large, hard-to-track informal sector, the ISP focuses strictly on the formal economy using GST data and direct administrative records (like railways and banking). On the other hand, Western and East Asian indices usually rely heavily on comprehensive monthly enterprise and turnover surveys.

Countries and regions that publish an ISP include Japan, China, South Korea. The US has a system that captures services activity on a quarterly basis. For the European Union, Eurostat publishes a comparable Services Producer Price Index and turnover indicators.