By Atanu Biswas, Professor of Statistics, Indian Statistical Institute, Kolkata
A significant trend in the economic and cultural changes in the last few decades is the increasing importance of the services sector. At present, the services sector is the primary source of global wealth generation. It has transformed the dynamics of economic growth through employment opportunities and exports. The nature of the services sector, too, has witnessed a major transformation in this century. With services offered electronically, consulting, software, and research and development can now be immediately exported to anywhere worldwide. From 2005 onwards, there has been a nearly threefold increase in the export of services. The present contribution of the services sector to global GDP is around two-thirds, rising to more than three-fourths in developed countries like the US.
Certainly, India’s GDP maintains an equilibrium between agriculture, manufacturing, and services, with agriculture sustaining the rural economy, manufacturing picking pace, and services driving growth. Yet, the services sector has rewritten the conventional approach to development in India as well. Around 54% of India’s GDP and 56.4% of gross value added (GVA) are generated by the services sector at present. India’s services sector exports have risen from $53 billion in 2005 to $338 billion in 2023, rising at a pace twice that of the rest of the world, according to a Goldman Sachs’ report published in 2024. Further, it has expanded more than India’s material exports.
Two recently published reports by NITI Aayog titled “India’s Services Sector: Insights from Employment Trends and State Level Dynamics” and “India’s Services Sector: Insights from GVA Trends and State Level Dynamics” provide important insights. India’s services sector has also emerged as a significant source of employment generation. In fact, employment in the sector has jumped to 29.7% in 2023-24 from 26.9% in 2011-12, adding around 40 million jobs over the preceding six years, thereby increasing service employment to 188 million, or roughly 30% of India’s labour force. Of course, India’s employment proportion in services still lags behind the global average of around 50%, suggesting a gradual structural transition.
The need to build an index of service production (ISP) was, in fact, felt before. A Technical Advisory Committee on Indices of Service Production (TAC-ISP) was constituted in 2004 and was subsequently reconstituted in 2010. Since then, especially in this digital age, the nature of services has changed significantly. The ministry of statistics and programme implementation recently published an approach paper on compilation of the ISP for the formal sector of the economy, reflecting the growing importance of the services sector in the economy. Distinct from the index of industrial production (IIP), the ISP is a crucial, high-frequency economic indicator that quantifies the monthly volume of output in the services sector. Undoubtedly, a monthly ISP that supplements the IIP would offer a more accurate view of the economy, facilitating improved analysis and policy development.
The ISP is regularly published by a number of advanced economies. For instance, Eurostat began regularly publishing the ISP for the European Union and the Euro region in 2017. The amount of service content in products, or the “servitisation” of economies, varies significantly, according to data. Similar indices can be found elsewhere as well. For instance, the UK compiles a comprehensive Monthly Index of Services, whereas South Korea publishes a monthly Service Industry Activity Index.
Guidelines and methods for measuring short-term production activities in the services sector by national agencies and international organisations can be found in the OECD Compilation Manual for Index of Services Production. As stated in the manual, “an ISP measures changes over time in the volume of output of the services sector. More precisely, it is defined as the ratio of the volume of output produced by the services industries in a given time period to the volume produced by the same industries in a specified base period.”
In fact, even if Indian intricacy would prevent any direct adaptation, these could work as guidelines. “As the most dynamic and dominant engine of the Indian economy, it [the services sector] has long been central to economic transformation, consistently driving growth, generating employment, and attracting investment across decades,” according to the approach paper.
Building an ISP will undoubtedly be difficult. The services sector is diverse in that it includes both traditional activities like trade, hospitality, and transportation that are still essential for creating jobs and domestic consumption, as well as high-value, contemporary services like IT, financial services, real estate, and professional services. This diversity is also reflected across states. Some states make substantial contributions through high-productivity, modern services, while others are more concentrated in traditional sub-sectors.
In addition to its great diversity, the country also boasts a sizeable informal chunk. One important source of information on formal services in industries including trade, transportation, hospitality, infotech, education, etc. is the Annual Survey of Incorporated Services Sector Enterprises (ASISSE), which primarily covers corporate entities. However, an ISP might use a combination of administrative, GST, and AISSE data. The GST Network has emerged as a powerful data source for production and outward supplies across different sectors of the economy.
However, we lack administrative data sources for a number of significant industries, including real estate, professional services, retail commerce, and so on. Therefore, to create an overall ISP, an ISP that covers roughly 70% of the GVA of services is suggested. Another significant challenge is selecting a suitable price deflator.
Keeping all these in mind, an ISP, even if it’s a less-than-ideal one, may be a welcome addition to the list of crucial economic indicators to gauge the state of the economy.
Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.
