Is India’s economic growth based on ghost firms and overestimation?
HEAD SHOT
- A new companies database introduced in 2015 to calculate GDP figures has come under fire for lack of legitimacy.
- As per a report from NSSO, the database has up to 31% companies are either shell firms or inactive companies.
- The NSSO findings were reportedly so damaging for the Government, that at least two reports were junked instead of being made public.
- Several economists, including CRISIL have opined that the GDP figures have an overestimation bias.
A new uproar concerning statistical inaccuracy has brought up the question of bias and negligence in India’s growth figure. As per findings revealed from a National Sample Survey Office (NSSO) study, lapses and lack of transparency was observed in the new database that defines the growth rate for the country’s GDP.
The findings have raised fresh doubts over the legitimacy of growth numbers the world’s largest democracy and Asia’s third largest economy. This is also reminiscent of 2017 when doubts were raised on the legitimacy of the new GDP calculations which failed to corroborate with older figures.
The Ghost of Shell Companies
In 2015, a key change was made in the way GDP numbers were derived in India. The new GDP series used a new database called MCA-21, which was derived by the CSO from the older database MCA.
A number of economists had come forward questioning the accuracy of the MCA-21 at the time of its release. There were concerns that the database included many fictitious (shell firms) companies with no background.
With growing concerns among economists about ghost firms existing only on paper in the database, demands were made to make the database public. This led to a survey by NSSO which found gross lapses on the part of the Central Statistics Office. CSO came under fire for using the database for critical national calculations without proper scrutiny and lack of transparency.
Inactive firms approved by Ministry of Corporate Affairs
A yearlong study that ended in June 2017 and released last week has found that as much as 36 percent companies in the MCA-21 database were not alive on the ground or were incorrectly classified.
That report by NSSO implicated CSO detailing on the grave negligence. As per NSSO, 15% companies in the new database were either untraceable or not in operation anymore. A further 21% were discovered to be not in the service sector as registered and depicted in national accounts.
A number of other firms in the database were found to have inconsistent statistics but were included in the data used for national GDP collation. As per the released report,
“The problem of non-response was severe in case of units chosen from MCA frame. About 45% of MCA units were found to be out-of-survey/casualty while EC/BR (economic census/business register) frame had about 18% of such cases.”
A number of firms were found to be fake or shell firms which had no more infrastructure that registration documents.
Damaging report hidden from public eye
The results were reportedly so disappointing – two detailed reports were discarded and only a smaller note was made public. The report points fingers on the scope of influence of the Ministry of Corporate Affair which had deemed these shell firms as active companies.
An active company is one which has filed returns at least once in the past three years. This gave substance to the concerns of economists. R. Nagaraj, Professor, Indira Gandhi Institute of Development Research, Mumbai said:
“This is a devastating blow for CSO. Some of us had repeatedly asked CSO officials to verify the MCA-21 numbers before using them in national accounts, but they finalized the new series without adequate scrutiny and debate.”
Nagaraj has argued that the database should be made public to allow statistical auditing by independent experts. Such demands were also made by the block which lauded CSO for taking a great methodological leap by CSO with the new GDP series.
Overestimation bias?
Many have also raised a red flag disputing the methodology used to collate the MCA-21 with national accounts. Economists have argued an overestimation in the GDP numbers.
India’s leading credit rating agency CRISIL had come out with a report pointing out over-escalation of numbers. CSO had released the first advance estimates on GDP for FY17 on January 6th, 2017 – which was a month in advance of the standard date of February 7th. This was done to facilitate bringing out the Union Budget by the beginning of February.
As per CRISIL, the CSO estimated of GDP growth rate decline to 7.1% from 7.6% represents an overestimate. CRISIL said the advance estimates may have had upward bias with CRISIL’s estimate standing at 6.9% for FY17.
It noted inaccuracy in numbers such as government consumption growth (23.8%) and government services growth (12.8%). It however did mention that the agriculture and industrial sector growth estimates were in sync with CRISIL’s forecasts.
Fall from grace for India’s famed Central Statistics Office
India’s Central Statistics Office was once a globally renowned institution which had developed a certain credibility around the accuracy of India’s official statistics. Statisticians notice the lack of oversight in the formulation and implementation of the new database as fall from the pedestal for the CSO.
P.C. Mohanan, ex-NSC member and ex-NSSO chief has alleged that MCA-21 database did not receive adequate scrutiny. Mohanan is one of the two NSC board members who resigned in December 2018 citing wrongful interference by the government on the unemployment statistics. He said:
“The CSO should have done some kind of critical scrutiny and validation before using the MCA-21 database in the new GDP series, either through quick surveys or by comparing with other databases, or consultations with accountants familiar with company filings,”
The CSO and the government have defended the legitimacy of the new database but have been hesitant in making it public.
PARTING SHOT
- The NSSO findings are reminiscent of 2017 when economists had questioned the legitimacy of new GDP figures which failed to corroborate with older ones.
- The 36% reported ghost or inactive companies were deemed active by Ministry of Corporate Affairs.
- CRISIL had published a report opining overestimation in the 7.1% growth figure by CSO, putting its number at 6.9% for 2017.
- Doubts are being raised at the legitimacy of CSO with allegations of lack of oversight and proper scrutiny when implementing the new database.
