Whalesbook
India is set to release its first Index of Services Production (ISP) in July, marking a significant step in economic measurement. This new index will offer a data-driven view of the services sector's output, moving beyond sentiment-based surveys to provide a clearer picture of economic performance.
Data and Methodology
The ISP will draw data from the Goods and Services Tax Network (GSTN) and administrative records from various government departments. This approach aims to overcome previous data limitations using digital technology. The first report, covering April's activity, will be released with a two-month lag. Officials expect the index to enhance the accuracy of quarterly and provisional national accounts.
Measuring Services Output
Currently, services sector analysis often relies on indicators like the HSBC Services Purchasing Managers' Index (PMI), which reflects managers' perceptions. The new ISP, however, will provide a direct, quantitative measure of actual output. While a consultation paper outlined the methodology, key sectors like health and education, representing 10% of services Gross Value Added (GVA), will not be included in the initial phase pending further data availability.
Sectoral Insights and Global Comparison
The services sector is a major growth driver for India, with contributions from IT, finance, and logistics. The ISP will enable more precise tracking of these sub-sectors. India's move to a production-based services index aligns with international best practices, although many developed countries have had similar indicators for years. While GSTN data offers a wide and consistent dataset, the exclusion of healthcare and education raises questions about the index's initial comprehensiveness. The Reserve Bank of India has frequently highlighted the services sector's dynamism, making the ISP a welcome addition to economic data.
Potential Limitations
While the ISP promises greater accuracy, some weaknesses exist. The initial exclusion of health and education sectors means the index won't fully represent services output at launch. Reliance on GSTN data might also face challenges in capturing informal economic activities. The two-month reporting lag, common for new statistical releases, limits its real-time use for immediate policy adjustments. Investors will watch for the expansion of the index to include more sectors and for any emerging data quality issues.
Future Development
After its July debut, the ISP is expected to become a key tool for understanding India's services sector. Future updates aim to shorten the reporting lag and include a wider range of sub-sectors. The index's development is vital for domestic economic planning and international benchmarking.