Statistical upgrade: An index of services production needn’t capture the sector perfectly to prove useful

“The service sector is the dominant force in the Indian economy, contributing over 50% of the Gross Value Added [GVA],” as a discussion paper on the idea released by the ministry notes, “It has long been central to economic transformation, consistently driving growth, generating employment, and attracting investment across decades.”

That’s the good part of our services story.

The not-so-good part is the absence of accurate, disaggregated and timely data on the services sector along the lines of India’s monthly Index of Industrial Production (IIP).

A monthly ISP that complements the IIP would provide a better picture of the economy, enabling better analysis and policy formulation. After all, India has more or less leapfrogged the typical manufacturing stage in its structural transformation, going straight from an agrarian to a services-led economy.

Since that leap has been in evidence for decades, how come we haven’t had an ISP so far?

Pin it on the heterogeneous nature of India’s services sector. Not only is it enormously diverse, it has a vast informal chunk. This makes it hard to standardize indicators of output so that a representative index can be compiled. Which might explain why this project has moved so slowly.

Despite a technical advisory panel task-force being set up back in 2004, it is only now that the idea has gained official traction.

Data sources pose a big problem. The recently launched Annual Survey of Incorporated Services Sector Enterprises (ASISSE) that covers mostly corporate entities could be a key data source on formal services in markets like trade, transport, hospitality, infotech, education, health, etc. But that will not suffice.

The ministry’s paper suggests relying on a mix of AISSE, GST and administrative data (from ministries). However, for several major industries such as real estate, professional services, retail trade, health and so on, we do not have administrative data sources—at least not with the consistency and frequency needed. Non-market services like public administration and defence are among the other segments that threaten to leave us with gaping data gaps.

Aware of these limitations, the discussion paper proposes an ISP that covers about 70% of the GVA of services to start with.

The choice of an appropriate price deflator is another headache. Given the perennial controversy over how data is shorn of inflation to estimate India’s real GDP growth, the ISP paper is candid about the pitfalls of applying practices like double-deflation—commonly used in manufacturing, for which we have both output and input prices—to services.

Globally, most countries use producer price indices. We do not have these yet, though the commerce ministry’s department for promotion of industry and internal trade is working on one. In the absence of a quality-adjusted price index, the statistics ministry’s paper suggests the use of a partially representative price index as a deflator.

Fortunately, several advanced economies publish service indices; these could serve as guides, even though Indian complexity would disallow any direct adaptation. All said, we need not wait for an accurate ISP to roll one out.

As a directional indicator, an index with even patchy coverage of the services sector would serve a purpose. It could always be refined as we go along.