The Case for Service Production Index

Unlike Index of Industrial Production (IIP), the services sector in India does not have a separate index to measure services production. The government is working on creating such an index. In a first, the government had come out with index for transport sector like railways, air transport, postal services, banking and telecommunication, based on recommendations of the technical advisory committee (TAC) led by C P Chandrasekhar. In recent times, the ministry of statistics and programme implementation (MOSPI) has proceeded to devise index on the social sectors like health and education as part of its bid to develop an index of service production in the lines of the Index of Industrial Production (IIP).

Peculiarity of Services Production

The term services sector covers both market and non-market services. It refers to economic activities carried out by:

• Wholesale and retail trade;
• Transport and repair of transport vehicles;
• personal and household goods;
• hotels and restaurants;
• storage and communications;
• financial intermediation;
• real estate, renting and associated business activities;
• public administration and defence;
• social security and social work;
• education and health;
• other community, social and personal activities;

Measuring services production is different from goods production for several reasons. First, unlike good, services are intangible and ownership rights cannot be established over services. Second, services are produced at the demand of the consumers and cannot be traded separately from their production.

Why to develop index for service sector?

Services sector is the most vibrant sector of the Indian economy. In 2014-15, services sector contributed nearly 52% to India’s GDP. With the advent of new technologies, services have account for a larger share of total economic activity. Further, due to outsourcing of routine services by manufacturers, dependence of each sector on services have increased manifold. As a result, there is a growing recognition that index of industrial production (IIP) alone will not be sufficient to evaluate performance of an entire economy. So, IIP needs to be accompanied by similar information for the services sector to have a holistic evaluation of the economy.

Why there is no index for services sector?

• The range of indicators pertaining to services sector is very limited and varies from country to country. Unlike industrial sector, this reason has made service indicators less comparable between the countries.
• There is also a lack of international guidelines for the development of separate index for the services sector.
• Since services cover a wide range of economic activities, there is a difficulty in collection of necessary information. This lag is due to the inherent nature of the services sector itself. For example, many small and medium sized establishments enter and leave the service market very frequently.
• Often services are also provided as a secondary activity of manufacturing by the non-service establishments making it difficult to identify the information related to them.

If a separate index for the services sector is devised, what should be its components?

The index of services sector should be able to measure changes over time in the volume of output of the Services sector. The index should be the weighted average of the real output of the industries of the service sector. The products included should be those that contribute to the gross output of the services industries. These products may be goods or services. It may also take into account those products that are not primary to the industries.

It would be recommended that the index for services comprise of two sub-indexes, one for Market Services Production and the other for Non-market Services Production.

The compilation of index for services sector requires a number of composite indicators. Given the complexity of data collection in the services sector, it would be recommended to use existing data related to specific individual services sub-sectors. For example, retail trade and wholesale trade can be directly made as a component to form the index with proper weights.

Global Practice

Many OECD Member countries are making significant efforts to measure their services sector. For example, the United Kingdom (UK), had experimented with monthly index of services (IoS). The Republic of Korea (Korea), which is using ‘Services Activity Index (SAI)’ in the late 1980s has recently made efforts to revise it. The US has recently introduced a new quarterly services survey. The Statistical Office of the European Communities, Eurostat has asked the member states of European Union (EU) to obtain information related to wide range of services on a regular basis. Canada has begun to enhance the collection of its services data to improve the quality of its monthly GDP.

Constraints in Indian context

• Lack of reliable and sufficient data to compile index for services.
• Indicators are yet to be identified in some sectors like Health. For example in the education sector, the indicators which can be used are teacher-student ratio and gross enrolment ratio. But, it becomes difficult to identify indicators in some sectors.
• Problem in identifying base years due to paucity of data.

Conclusion

With Services contributing to more than half of India’s GDP, it would be necessary to devise index for services sector to have a holistic evaluation of the Indian economy. India can take the help of other countries which have successfully developed services index to overcome the challenges it faces.

GS Question for Mains

Despite the fact that services share a huge fraction of India’s GDP, there is no index of service production similar to Index of Industrial Production.  How measuring services production is different from goods production? Discuss while enumerating the key heads of such index.