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GS Paper: GS3-12.Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth

  • Index of Services Production (ISP)

    Why in the news?

    The Ministry of Statistics and Programme Implementation (MoSPI) will launch the Index of Services Production (ISP) in July 2026 as India’s first monthly indicator to measure short term growth in the services sector.

    What is ISP?

    • Index of Services Production (ISP) is a monthly high frequency indicator that measures changes in the real output (volume) of the formal services sector relative to a base year.
    • It is the services sector counterpart of the Index of Industrial Production (IIP).

    Key Highlights

    • Nodal Ministry: Ministry of Statistics and Programme Implementation (MoSPI).
    • Base Year: 2024-25.
    • First Trial Release: 14 July 2026 (for 2025-26 and April 2026).
    • Release Frequency: Monthly, with a 60 day time lag.
    • Compiled using a fixed weight Laspeyres Volume Index.
    • Weights are based on Gross Value Added (GVA) of service sectors.

    Objectives

    • Complement the Index of Industrial Production (IIP).
    • Provide high frequency data on the services sector.
    • Improve economic forecasting and business cycle analysis.
    • Strengthen evidence based policymaking.

    Coverage

    • Included Sectors: Wholesale and retail trade, Transport, Banking and insurance, Telecommunications, Hotels and restaurants, Real estate, Professional, scientific and technical services, Arts, entertainment and recreation
    • To be Included Later: Health services and Education services (after availability of ASISSE data).

    Data Sources

    • Administrative data: Air Transport, Railways, Banking and Insurance.
    • GST (GSTR-1 outward supplies): Most service industries.
    • Annual Survey of Incorporated Services Sector Enterprises (ASISSE): Health and Education.

    Why is ISP Important?

    • Services contribute over 50% of India’s Gross Value Added (GVA) since 2013-14.
    • Provides timely tracking of service sector performance.
    • Enables faster policy response and economic monitoring.
    • Aligns India with international statistical practices.

    Limitations

    • Covers only the formal services sector.
    • Excludes: Public administration and defence, Government health and education, Social work without accommodation, Household services, Activities of extraterritorial organisations, Gambling and betting, Other predominantly non market and informal services.

    What is the proposed compilation formula?

    • ISP is proposed to be compiled using a fixed-weight Laspeyres Volume Index
      • Measures changes in output using fixed base year weights.
      • Widely used for indices such as IIP due to ease of comparison over time.

    [2020] Consider the following statements:
    1.The weightage of food in the Consumer Price Index (CPI) is higher than that in the Wholesale Price Index (WPI).
    2.The WPI does not capture changes in the prices of services, which the CPI does.
    3.The Reserve Bank of India uses WPI as its key measure of inflation to decide changes in policy rates.
    Which of the statements given above is/are correct?

    [A] 1 and 2 only

    [B] 2 and 3 only

    [C] 1 and 3 only

    [D] 1, 2 and 3

  • Examine the impact of liberalization on companies owned by Indians. Are they competing with the MNCs satisfactorily? Discuss.

  • Normally countries shift from agriculture to industry and then later to services, but India shifted directly from agriculture to services. What are the reasons for the huge growth-services vis-a-visindustry in the country? Can India become a developed country without a strong industrial base?

  • Craze for gold in Indians have led to a surge in import of gold in recent years and put pressure on balance of payments and external value of rupee. In view of this, examine the merits of Gold Monetization Scheme.

  • There is a clear acknowledgement that Special Economic Zones (SEZs) are a tool of industrial development, manufacturing and exports. Recognising this potential, the whole instrumentality of SEZs require augmentation. Discuss the issue plaguing the success of SEZs with respect to taxation, governing laws and administration.

  • How globalization has led to the reduction of employment in the formal sector of the Indian economy? Is increased informalization detrimental to the development of the country?

  • “Industrial growth rate has lagged behind in the overall growth of Gross-Domestic-Product (GDP)in the post-reform period” Give reasons. How far the recent changes is Industrial Policy are capable of increasing the industrial growth rate?

  • Account for the failure of manufacturing sector in achieving the goal of labour-intensive exports rather than capital-intensive exports. Suggest measures for more labour-intensive rather than capital-intensive exports.

  • How would the recent phenomena of protectionism and currency manipulations in world trade affect macroeconomic stability of India?

    The rising protectionism and currency manipulations have disrupted global trade flows and have direct implications for India’s growth, inflation, fiscal balance, and external vulnerability.

    Tools of Protectionism

    Tariffs

    Quotas

    Import Licensing

    Sanctions

    Exchange Controls

    Industrial Subsidies

    Impact of Protectionism on Macroeconomic Stability of India

    Export Slowdown due to high tariffs. Eg: US protectionism under Section 232 hurt India’s steel exports.

    Supply Chain Disruptions lead to higher Production Costs. Eg- higher oil prices after Israel-Palestine conflict

    Imported Inflation due to barriers on food, energy and intermediate goods. Eg: Indonesia palm oil ban.

    Weak Employment in Export-oriented Sectors – Eg: Fall in European demand hit India’s textile and leather clusters.

    Lower FDI Inflows – Uncertain trade regimes discourage long-term investments. Eg- Apple cancelling plant in India after Trump threat.

    Impact of Currency Manipulations on Macroeconomic Stability

    Widening Trade Deficit – Undervalued currencies make their exports cheaper. Eg- China’s managed yuan

    Rupee Volatility creates monetary Policy Challenges. Eg: Yen depreciation in 2023-24 triggered pressure on Asian currencies including INR.

    Higher Inflation and BoP Pressure – Eg: INR touching 83-84 per USD raised petroleum import bills.

    Capital Outflows due to dollar strengthening. Eg: 2022-24 saw FPI outflows during phases of aggressive US Fed tightening.

    Pressure on Forex Reserves – Eg: RBI sold USD in 2022-23 to stabilise INR, reducing reserves temporarily.

    Opportunities for India Amid Protectionism & Currency Politics

    China+1 Advantage in electronics, chemicals, renewables. Eg- Mobile exports crossed USD 11 bn in 2023-24.

    Boost Make in India to build self-reliant supply chains. Eg: PLI schemes in semiconductors, textiles, solar modules.

    Diversification of Trade Partners – Eg- Recent FTA with UK

    Strategic Attractiveness as a Stable Market – Amid volatile currencies and geo-economic blocs, India is seen as a stable investment destination.

    Promoting Rupee Trade Mechanisms – Eg- INR invoicing and Vostro accounts.

    Opportunity to Lead on Fair Trade Norms in WTO, G20 on currency transparency and non-tariff barriers.

    Way Forward

    Enhance R&D (2.5% of GDP), reduce logistics costs (PM Gati Shakti), and expand PLI schemes to boost manufacturing resilience.

    Accelerate FTAs with EU, GCC to reduce over-dependence on a few partners.

    Strengthen FOREX buffers and expand rupee trade settlement

    Encourage domestic production of critical inputs (electronics, APIs, green tech) to reduce vulnerability to global shocks.

    Scale IT, fintech, health tourism, education services to offset goods-trade shocks from rising protectionism.

    By strengthening domestic competitiveness, India can position itself as a reliable, rules-based and resilient player in the evolving global economic order.

  • Discuss the merits and demerits of the four ‘Labour Codes’ in the context of labour market reforms in India. What has been the progress so far in this regard?

    The Central Government consolidated 29 existing central labour laws into four codes to simplify the legal framework, improve ease of doing business.

    4 Labour codes-

    Code on Wages

    Industrial Relations Code

    Code on Social Security

    Occupational Safety, Health and Working Conditions Code

    Merits

    Merging and Simplification of laws reduces complexity and overlaps.

    Uniform definitions & wage protections: Eg- code on Wages introduces a floor wage

    Flexibility in hiring/retention: IR Code raises the threshold for requiring government approval for layoffs/closures from 100 to 300 workers.

    Broader social security coverage: SS Code covers gig workers, platform workers, unorganised sector. (presently only 25%)

    Improved safety and working conditions: OSHWC mandates working hours, safety standards, migrant worker welfare.

    Promoting formalisation through clearer rules and digital compliance systems.

    Minimise exploitative practices – Eg: provision for overtime wages twice normal wages

    Easier resolution of industrial disputes – Eg: 14 days’ notice period before strikes & lockdowns

    Demerits

    Transition and Adaptation Challenges as India’s labour market is 90% informal, contributing nearly 50% of GDP

    Weakened collective bargaining: IR Code imposes stricter conditions on strikes (60 days’ notice).

    Job-security concerns: Increased flexibility may lead to precarious employment. Eg- fixed-term employment, easier layoffs

    Increased burden on SMEs: Eg- requirements such as documentation of wages, benefits, safety norms, etc..

    Inconsistent Application Across Sectors – agriculture (60% of informal workforce) and construction (~50 million workers) face seasonal work, casual labour, and absence of contracts

    Rising Costs for Businesses

    Gratuity obligations

    PF contributions

    Maternity benefits (26 weeks paid leave + crèche facilities)

    Progress So Far

    All four codes are legally enacted between 2019-20.

    34 States and UTs have notified draft rules but full implementation is pending.

    The Centre has initiated digital portals (e-Shram, unified labour compliance) to support implementation.

    Resistance from trade unions and worker groups continues. Eg- strikes by AITUC and CPI

    Labour is a concurrent subject – state-level variation persists.

    Enforcing labour codes can bring in transparency, simplification & digitization in compliance. This can help India to become a manufacturing hub as companies adopt the “China+1” strategy.