NEW DELHI: The finance ministry on Friday admitted that the way the government calculates gross domestic product (GDP) may lead to an overestimation in numbers, but said its extent “in all likelihood is marginal".
It was responding to a Mint report, which said a key database introduced in India’s new GDP series, MCA-21, has been found to be full of gaps, citing a report prepared by the National Sample Survey Office (NSSO). The NSSO report, based on a field survey of services firms, had found that 16.4% companies are either non-traceable or closed, and another 21.4% were “out-of-coverage" or mis-classified.
Reacting to Mint’s Wednesday report, the finance ministry said the problems in the MCA-21 database were being fixed, and that with “continuous evolution of the MCA database, the proportion of closed and non-traceable enterprises has been falling".
It said that it is possible that many of the firms which were mis-classified were actually manufacturing firms and may be contributing to overall output even though they may not be contributing to the services sector of the economy.
This is the first official acknowledgment that the Central Statistics Office (CSO) may be failing to capture the share of different sectors of the economy correctly.
On Wednesday, the ministry of statistics and programme implementation (Mospi) said it was examining the findings of the NSSO report and that it would take “remedial steps" based on the findings to improve the GDP series when the next base change revision takes place. It said adequate care was being taken to ensure that the GDP numbers were not affected.
However, the ministry’s response failed to convince some economists and statisticians, and raised even more questions. “I don’t know why the finance ministry is issuing this," said Pronab Sen, former chief statistician. “This should have been issued by Mospi. That in itself raises questions. This is something seriously out of kilter."
Some economists have questioned the manner in which the MCA-21 database has been plugged into the national accounts, arguing that the presence of a large number of fake or closed firms in the “active" MCA-21 database makes it likely that India’s GDP is being overestimated. To account for non-reporting firms, Mospi uses a multiplier or “blow-up" factor based on the paid-up capital reported by these firms at the time of their registration. Any firm that has filed a return at least once in the past three years is classified as an “active" company by the MCA.
Economists such as R. Nagaraj of the Indira Gandhi Institute of Development Research (IGIDR) and Mahesh Vyas of the Centre for Monitoring Indian Economy have argued that this methodology is wrong. This methodology could be overestimating GDP, said Nagaraj.
Others, such as Sen, have argued that the problem of overestimation may only be true for the first set of GDP estimates when the sample of reporting companies is small and, hence, a “blow-up factor" (or multiplier) is used to arrive at the GDP estimates.
Sen, in a debate on CNBC TV18 on Thursday, said the final or revised estimates do not have this problem since they are based on all reporting companies. During the same debate, Nagaraj questioned Sen’s contention and argued that even the final estimates were being “blown up".
The finance ministry statement seems to support Nagaraj’s contention as it reports a blow-up factor for each year from 2012-13 to 2016-17.
Responding to the finance ministry’s statement, Sen said that if the blow-up is still being used for the final estimates, there is a problem.
The finance ministry has, however, sought to downplay the blow-up issue, arguing that the number of enterprises for which the blow-up factor is applied accounts for only 12-15% of all enterprises in the MCA-21 database.
“Even if there is a small over- or under-estimation, the blowing up affects the level of GDP and not the year-to-year annual growth rates materially," the statement said.
Nagaraj said the finance ministry’s defence of Mospi’s methodology faces a “credibility problem". “As the number of companies used for estimation keeps varying from one revision (of GDP) to another, there does not seem to be any certainty either about the sample size or the universe of companies being considered," he added. “This is a flawed and opaque methodology."
“The reply assumes that the data from MCA-21 is in perfect order and they are able to aggregate all the balance sheets to arrive at the GVA (gross value added). This is incorrect, as critics had pointed out. The problem lies there because what is uploaded by companies has a lot of loopholes, such as inconsistencies between the aggregate revenue and disaggregated revenue total," said Nagaraj.