Serving the economic cause of services

Ministry of statistics and programme implementation (MoSPI) has scheduled to launch a trial index of services production (ISP) - on the lines of the index of industrial production - tomorrow. It should offer a high-frequency snapshot of economic activity despite its many shortcomings. Indices for service are more complex to build than for physical factory output. Which is why most countries go about assessing health of the services sector in a roundabout way. India will join a select group of countries that attempts a direct estimation despite methodological challenges. Improving datasets inspires confidence in the venture, and the readings can provide direction to policy with appropriate caveats in place.

The foremost being exclusion of the informal economy, which, in India's case, has a large contribution to output. Retailing is a case in point, and it will have one of the highest weights in the index. Yet, data capture can only improve as the sector formalises. Even otherwise, the formal and informal segments operate in conjunction. On the other hand, the heaviest weight in the index will go to the IT sector, where measurements are precise. Another complication in devising a services index is the lack of specific price deflators. Workarounds are available through proxies that best suit a particular service. Wholesale trade will be deflated by WPI, while banking will use CPI. The degree of precision will vary because of the price deflator.

Finally, there are outright exclusions - health, education, defence and government services. These are big chunks of the services sector that are being kept out till methods are available for realistic assessment. The index is likely to provide a sense of direction, rather than a measure of distance travelled. To that extent, it should aid navigation. The statistics will, of course, have to undergo continuous improvement for real-time economic analysis. GoI deserves credit for setting the ball in motion on an ambitious undertaking.