 "Lower inflation, high tax outgo explain mismatch between corporate performance and GDP growth: Pronab Sen")
Many, including Reserve Bank of India Governor Raghuram Rajan, have noted the contradiction between the high gross domestic product (GDP) growth numbers and poor corporate earnings for 2014-15, particularly the fourth quarter. Pronab Sen, who heads the National Statistical Commission (NSC) that had approved the methodology for the new series of GDP, talks about this to Indivjal Dhasmana. Edited excerpts:
There is a lot of criticism of GDP data on the ground that it showed high growth in manufacturing, while companies' results did not reflect this. Do you take it as a fair criticism?
No. The top line (revenue data) of companies has to be seen in the context of low WPI (Wholesale Price Index) inflation for manufacturing, 2.43 per cent on an average in 2014-15. So, there was a miniscule price increase in manufacturing. Whatever value addition came primarily from quantity. Now, the manufacturing IIP (Index of Industrial Production), which gives growth in volume terms, rose only 2.3 per cent in the year. So, this explains the weak growth in the year. In the fourth quarter of the year, WPI inflation for manufacturing dropped much more, to 0.39 per cent, while manufacturing grew a bit more, by 3.6 per cent, compared to the entire year. So, this explained the poor top line growth of manufacturing in 2014-15, particularly in the fourth quarter (Q4).
Companies give much more taxes in the fourth quarter of a year than the previous three. This is a typical trend. As such, the profit after tax would yield less of growth in Q4.
In its monetary review, the Reserve Bank of India deliberated more on the gross value added (GVA) than gross domestic product (GDP). As a matter of study, which indicator should we take?
Always GDP. It is total income generated in the economy. This income may then be shared by the government, labour and businesses or capital. If GDP grew 7.5 per cent in Q4, just behind 8.4 per cent in second quarter (Q2), while GVA rose only 6.1 per cent in Q4, the lowest in any three months of the year, it showed the government took much more through taxes in the fourth quarter compared to earlier ones.
R Nagaraj, a non-official member of the Central Statistics Office's (CSO's) first sub-committee, objected to blowing up the methodology used in the GDP estimation for the non-financial private corporate sector. His argument is when you blow up, you are erring because many of these companies remain on paper and do not produce any goods or services. Do you find the criticism sound?
We have to go by what the ministry of corporate affairs is telling us. There are some 900,000 active companies, which means those which have filed a balance sheet with MCA-21 (the ministry's e-governance initiative) at least once in the previous three years. We follow that.
Then, why has a committee under you been set up to verify the methodology in estimating manufacturing in GDP data? Is it a new committee, announced after the provisional estimates of GDP were out last month?
No, the committee was set up way back, when the CSO came out with its earlier estimation of GDP in January-February. It is a standard practice, whenever CSO changes the methodology of estimation. CSO came out with new GDP data after the NSC approved the new methodology. We are essentially reviewing whether the methodology as approved by NSC was adopted by CSO or not. It is not related to the criticism.
Will you review the methodology in agriculture and services sector data of GDP as well?
Not agriculture, as the methodology there has not changed. However, we will review the methodology in the services sector, after we are done with the manufacturing sector. Earlier, services sector data were based on the National Sample Surveys, using the labour input method. Now, the corporate part of the services sector is based on MCA-21 filings and the non-corporate segment from service tax.
There is a lot of criticism of GDP data on the ground that it showed high growth in manufacturing, while companies' results did not reflect this. Do you take it as a fair criticism?
No. The top line (revenue data) of companies has to be seen in the context of low WPI (Wholesale Price Index) inflation for manufacturing, 2.43 per cent on an average in 2014-15. So, there was a miniscule price increase in manufacturing. Whatever value addition came primarily from quantity. Now, the manufacturing IIP (Index of Industrial Production), which gives growth in volume terms, rose only 2.3 per cent in the year. So, this explains the weak growth in the year. In the fourth quarter of the year, WPI inflation for manufacturing dropped much more, to 0.39 per cent, while manufacturing grew a bit more, by 3.6 per cent, compared to the entire year. So, this explained the poor top line growth of manufacturing in 2014-15, particularly in the fourth quarter (Q4).
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What about the bottom line (profit)?
Companies give much more taxes in the fourth quarter of a year than the previous three. This is a typical trend. As such, the profit after tax would yield less of growth in Q4.
In its monetary review, the Reserve Bank of India deliberated more on the gross value added (GVA) than gross domestic product (GDP). As a matter of study, which indicator should we take?
Always GDP. It is total income generated in the economy. This income may then be shared by the government, labour and businesses or capital. If GDP grew 7.5 per cent in Q4, just behind 8.4 per cent in second quarter (Q2), while GVA rose only 6.1 per cent in Q4, the lowest in any three months of the year, it showed the government took much more through taxes in the fourth quarter compared to earlier ones.
R Nagaraj, a non-official member of the Central Statistics Office's (CSO's) first sub-committee, objected to blowing up the methodology used in the GDP estimation for the non-financial private corporate sector. His argument is when you blow up, you are erring because many of these companies remain on paper and do not produce any goods or services. Do you find the criticism sound?
We have to go by what the ministry of corporate affairs is telling us. There are some 900,000 active companies, which means those which have filed a balance sheet with MCA-21 (the ministry's e-governance initiative) at least once in the previous three years. We follow that.
Then, why has a committee under you been set up to verify the methodology in estimating manufacturing in GDP data? Is it a new committee, announced after the provisional estimates of GDP were out last month?
No, the committee was set up way back, when the CSO came out with its earlier estimation of GDP in January-February. It is a standard practice, whenever CSO changes the methodology of estimation. CSO came out with new GDP data after the NSC approved the new methodology. We are essentially reviewing whether the methodology as approved by NSC was adopted by CSO or not. It is not related to the criticism.
Will you review the methodology in agriculture and services sector data of GDP as well?
Not agriculture, as the methodology there has not changed. However, we will review the methodology in the services sector, after we are done with the manufacturing sector. Earlier, services sector data were based on the National Sample Surveys, using the labour input method. Now, the corporate part of the services sector is based on MCA-21 filings and the non-corporate segment from service tax.