Explained: Why India is launching its first Index of Services Production and why it matters

India is set to plug a major gap in its economic data architecture with the launch of the country's first Index of Services Production (ISP) on July 14, providing policymakers, businesses, and investors with a monthly snapshot of activity in the country's largest economic sector. 

Developed by the Ministry of Statistics and Programme Implementation (MoSPI), the new index is designed to do for the services sector what the Index of Industrial Production (IIP) has long done for manufacturing, offer a high-frequency measure of output and economic momentum. The introduction of the ISP marks a key milestone because the services sector accounts for more than half of India's economy, contributing around 55% of the country's Gross Value Added.

Why does India need an Index of Services Production? 

Over the past decade, India has increasingly become a services-driven economy. Industries such as banking, insurance, information technology, telecommunications, transport, hospitality, professional services and trade now generate the bulk of economic output and employment. 

Despite this growing importance, India has relied largely on quarterly GDP estimates and scattered sector-specific indicators to assess services sector performance. Unlike manufacturing, which has the IIP, there has been no comprehensive monthly gauge capturing changes in service output. 

The ISP seeks to bridge this gap by providing a high-frequency indicator that measures changes in the volume of services produced over time relative to a fixed base year. 

According to MoSPI, the index will complement the IIP and provide policymakers with timely information on economic trends, enabling faster, and more informed policy interventions. 

What exactly is the ISP? 

The Index of Services Production is a monthly volume-based index that measures the real output of service-producing industries. Rather than measuring revenues alone, the ISP attempts to capture changes in the actual quantity of services produced after removing the impact of inflation. This makes it a better indicator of real economic activity than nominal turnover figures. 

The trial series will use 2024-25 as the base year, aligning it with the revised Consumer Price Index (CPI) base. Initially, the index will be released every month with a lag of about 60 days. 

Why couldn't India launch it earlier? 

Compiling a services production index is considerably more complex than measuring factory output. Unlike manufacturing, where production can be counted in physical units such as tonnes of steel or number of automobiles, services are largely intangible. Many activities, from consulting and software services to banking and healthcare, do not have directly measurable physical output. 

MoSPI says three major constraints had prevented the creation of the ISP in the past: 

Lack of high-frequency administrative datasets covering service industries. 

Wide diversity of services requiring different measurement techniques for each subsector. 

Absence of reliable price indices needed to convert value-based data into real output. 

These challenges made it difficult to develop a comprehensive monthly index. 

What has changed now? 

India's digital economic infrastructure has improved dramatically over the past decade, making the ISP possible. The biggest enabler has been the availability of high-frequency GST data, particularly monthly information on outward supplies filed through GSTR-1 returns. 

In addition, the launch of the Annual Survey of Incorporated Services Sector Enterprises (ASISSE) provides regular data for sectors such as health and education, which are largely outside the GST framework. 

Which sectors will the ISP cover? 

The index will draw data from three major sources. Administrative data will be used for sectors such as: air transport, railways, banking, and insurance. 

GST data will cover a broad range of industries, including wholesale and retail trade, hotels and restaurants, road and water transport, warehousing, postal and courier services, telecommunications, information technology, media and broadcasting, real estate, professional and scientific services, administrative services, arts, entertainment, and recreation. 

Meanwhile, ASISSE data will be used to estimate output in private health and education services, which are exempt from GST. 

Which sectors are excluded? 

 The ISP will primarily capture activity in the formal services economy. Several sectors will remain outside its scope, including public administration and defence, government-run health and education, social work activities, Membership organisations, Personal services, domestic household services, extraterritorial organisations, gambling and betting, and certain financial services outside banking and insurance sector. 

Since the index relies heavily on GST data, the informal services sector will not be directly covered. 

How does the ISP measure service output? 

The methodology varies across sectors. For aviation and railways, physical output indicators such as passenger kilometres travelled are used. For most other sectors, output is measured through turnover or outward supplies, primarily using GST data. 

MoSPI notes that services are generally consumed immediately after they are produced and therefore do not involve inventory accumulation. As a result, turnover is considered a close proxy for production. 

Why is the ISP important? 

Economists have long argued that India's statistical framework has lacked a timely indicator for its largest economic sector. The introduction of the ISP is expected to improve macroeconomic monitoring by providing policymakers with monthly information on services activity. 

It will also strengthen GDP estimation, improve business cycle analysis, enhance economic forecasting, and offer investors and researchers a clearer picture of trends in India's rapidly expanding services economy.