Counting companies that merely reported their financials once in three years in GDP calculation would lead to an overestimation of economic activity, statisticians and economists warned, casting fresh doubts over the credibility of official statistics.
The government, however, claimed that the presence of ghost companies in the government database has no impact on economic data and a recent study was undertaken to understand the data gaps and take remedial steps.
The controversy surrounding the new series of GDP numbers based on the MCA-21 database intensified after Mint reported on Wednesday that 38% of companies that are part of the database could not be traced or were wrongly classified. The Mint report was based on a survey conducted by the National Sample Survey Office (NSSO), a government agency.
An erosion of credibility in economic data released by the government, which comes at a time when economists have raised concerns about the politicization of economic and job data, could undermine investor confidence in India.
Statisticians contend that the inclusion of firms that have not reported data in a particular year but are included in the computation of gross value added (GVA), the measure of the value of goods and services produced in a country, may lead to erroneous results.
According to the current methodology, if a company does not report data in a particular year, the Central Statistics Office (CSO) relies on a “blow-up" technique that uses the paid-up capital (PUC) at the time of setting up of the company as the basis for computation of GVA by that company. This leads to overestimation of the economic activity as it does not reflect actual production of goods and services and also takes into account fake firms.
“Such fake companies should not be part of GVA computation procedure at all. For blowing up the sample estimates, only those companies should be included in the universe of companies, which are producing goods and services on a regular basis," said R. Nagaraj, a professor at the Indira Gandhi Institute of Development Research in Mumbai.
Other top statisticians and economists said there are plenty of issues with the current method of GDP calculation that might lead to misleading interpretations about economic growth.
“India had a global reputation for the quality of its statistics. It is unfortunate to see this damaged. On the plus side, this can explain why India’s GDP numbers were not matching with its poor record of job creation," Kaushik Basu, professor of economics at Cornell University and former chief economist of the World Bank, said in a post on Twitter.
Mahesh Vyas, managing director and CEO of CMIE, said his firm does not take the corporate affairs ministry’s categorization of companies into active and non-active seriously. “It would be hazardous to assume that the database is usable directly. We would not do that and would not recommend this to anyone," he said.
In its statement on Wednesday, the statistics and programme implementation ministry said “it is emphasised that there is no impact on the existing GDP/GVA estimates for the corporate sector as due care is taken to appropriately adjust the corporate filings at the aggregate level based on the paid up capital".
The ministry said the recent NSSO exercise to bring out a technical report on the services sector was commissioned to understand the data gaps and take remedial steps while undertaking the new base revision exercise for the proposed 2017-18 series.
This is, however, not the first time that the inclusion of shell firms on the MCA-21 database has been highlighted by a government arm. A 15 July 2018 National Statistical Commission report warned CSO of similar issues with the database. This committee included senior CSO officials, apart from a number of independent experts. The report had recommended that there be a cross-validation study on data on corporate bodies with single manufacturing unit available from the two sources—MCA and the Annual Survey of Industries—on which GDP computations are based.
Responding to a query, former chief statistician Pronab Sen said the use of paid-up capital as the basis for computing GVA of all non-reporting firms is erroneous. “It (paid-up capital) is not only a stock variable, it is worse. It is a historic stock variable." He said it might be better to use total capital employed as the “blow-up factor" for computing GVA of the “non-reporting" companies.
However, in an interview with Business Standard, following the controversy, Sen said GDP would be underestimated if transactions with benami firms were not captured. The NSSO frame was of active companies and it was known that some were shell firms. But not including them in GDP calculations would amount to not capturing all transactions in the economy.
An earlier version of this story incorrectly stated that 15% of companies in the MCA-21 database used for an NSSO surveyed could not be traced or were found to be closed, and that 36% of companies could not be traced or were wrongly classified. The actual numbers reported by the NSSO are 16.4% and 38%. The errors are regretted.