Revisiting the GDP debate

With the Reserve Bank of India (RBI) finally publishing estimates of gross value added (GVA) derived from the MCA database, it is now possible to examine whether the criticism levied against the new gross domestic product (GDP) series is justified or not. Of particular interest is the rather contentious issue of just what has been driving GDP growth?

Both T C A Anant, chief statistician of India and Pronab Sen, former chairman, National Statistical Commission have argued that during this period, growth was driven largely by small and medium-sized companies. But their claims have been vehemently contested by economists.

The data released by the RBI can now finally put this controversy to rest as they clearly show smaller companies have fared better than their larger counterparts during the past few years. But doubts remain about the manner in which these estimates have been blown up to arrive at consolidated GVA estimates of non-government non-financial corporate sector.

Before proceeding, it is important to first describe the data sets released by the RBI. The central bank has released two data files. The first details value added by 239,398 non-government non-financial private limited companies. These companies form the so-called micro, small and medium enterprises (MSME) sector. The second data set pertains to 16,923 non-government non-financial public limited companies, which are predominantly the big companies.

According to these data sets, GVA by smaller companies grew at a staggering pace, estimated at 16.9 per cent in 2014-15. By comparison, GVA of larger companies grew at a modest 10.5 per cent. For the manufacturing sector, GVA by the MSME sector grew at a scorching pace of 16.2 per cent in 2014-15, though GVA by the public limited companies also grew at a robust 12 per cent.

Economist Surjit Bhalla, one of the few vocal supporters of the new GDP series, has taken these growth rates to buttress his claim that the controversy surrounding the new GDP series is completely unwarranted.

On the face of it, Bhalla's claims do seem justified. Even R Nagaraj, professor at Indira Gandhi Institute of Development Research, a vociferous critic of the new series, concedes that the smaller companies have, in fact, grown at a faster pace.

But the problem that Nagaraj highlights is the contribution of smaller companies to GVA is minuscule. "The share of the small companies is really minuscule: 2.1 per cent of domestic output, or 6.5 per cent of non-financial private corporate sector output. So, the question is: Can the long tail of small companies really wag the economy? Surjit Bhalla (and others like him) thinks it can. I really doubt it," he says. If these small companies really account for a fraction of the total non-government non-financial corporate sector, then their growth rates, no matter how high, will not push up overall growth rates by that magnitude.

To judge the validity of Nagaraj's claim, Business Standard estimated GVA from the two data sets. According to these estimates, GVA by the smaller companies is roughly 6.1 per cent of GVA by private non-financial corporations in 2014-15, while that for the larger companies it is 23 per cent. So Nagaraj's claim on that account seems to be right. But this leads us to a tricky methodological issue, which is really the last serious piece of criticism of the new GDP series.

Data from the MCA site show that at the end of 2012-13, there were a total of 705,454 private limited companies and 49,727 public limited companies. Currently there are over a million active companies.

The difference between the numbers of companies is largely because not all the companies in the MCA database regularly file returns. So the Central Statistical Office (CSO) takes data of the companies that has been updated and blows it up to arrive at an estimate of the whole universe.

This is where it gets fuzzy. The exact blowing-up factor used for this is not available in the public domain. Conversations with ministry of statistics and programme implementation officials reveal that the factor used to blow up is the ratio of the paid-up capital all active companies registered with the MCA to that of the companies actually used for GVA calculations.

Let us for a moment assume that these 705,454 private limited companies and 49,727 public limited companies form the entire universe of companies that CSO refers to. Then using data released by the RBI, the blowing-up factor for smaller companies works out to 4.48, while for the larger ones it is 3.35.

But this process is contentious. And as that in turn would affect growth rates, scepticism about growth rates under the new series persists.

"The official number (of companies) is spurious because, large swathes of small companies are fictitious/bogus/shell companies which rarely, if ever, submit their audited balance sheet to MCA. Therefore, "blowing up" for the imaginary universe of active companies could cause an over-estimation of the size and growth rates of private corporate sector," says Nagaraj.

But Anant rebuts these claims. "The principle of active companies is a moving average of three years. If you file in the MCA once during the three years, you are considered active. The purpose of GDP is to give an estimate of the whole," he says.

Theoretically, it is possible for some of these firms, registered with the MCA, to cease production. Thus, blowing up for them may not be correct. But, it is possible that many simply delay their filings. This does not mean they have ceased production.