India’s Gross Domestic Product could be ‘grossly bloated product’

A key database that was used to calculate India's GDP had companies that existed only on paper, a study by the National Sample Survey Office has shown

New Delhi: The study that was released by the National Sample Survey Office (NSSO) last week has poked holes into India's new gross domestic product (GDP) series and has once again raised fresh questions over the veracity of the numbers projected by the Narendra Modi-led government at the Centre. According to a report by Mint, a key database that was used to calculate GDP was full of holes.

Where is the loophole?

The NSSO study, which is based on the 12 months that ended in June 2017, found that as much as 36 percent of companies that are part of MCA-21 database of companies and are used in India's GDP calculations could not be traced or were wrongly classified. These companies were categorised as "active companies" by the Ministry of Corporate Affairs, which basically includes any company that has filed returns at least once in the past three years.

The findings of the NSSO study

The NSSO study was a first-of-its-kind survey on the service sector. The MCA-21 database required for the same was used as part of the sampling frame for the survey as it had addresses and other details of firms. Other parts of the sampling frame were sourced from business registers in states that had such registers and data from the last economic census.

That NSSO report found that at least 15 percent of the firms listed in the MCA-21 frame either could not be traced or were found to be closed. Another 21 percent were found "out of coverage," suggesting they were no longer operating as service sector firms though they had registered. Others that had been correctly identified did not respond to survey questions, or didn't maintain proper accounts on the basis of which enumerators could capture data on those firms.

This survey strategy had received a nod from the National Statistical Commission (NSC) two years ago and a tabulation plan for the two reports that were to be generated on the basis of this survey was also approved by it. However, the disappointing results yielded by the survey from the field prompted the NSC to have a short technical report on it instead of the two reports it had sanctioned earlier.

Why is presence of shell firms in MCA-21 database an issue?

Critics are of the opinion that the MCA-21 database has many fictitious or shell firms that exist only on paper. Plugging these numbers while calculating the GDP growth leads to "an overestimation bias in the GDP numbers."

MCA-21 part of key change introduced by govt in GDP series in 2015

Among the changes that the government made to the metrics for calculating GDP growth in 2015 was the use of MCA-21 database. Even at the time, several economists had raised questions on the issue.

So far, India's national accounts statisticians at Central Statistics Office (CSO) have defended the use of the database. But they have stopped short of making it public.

'A devastating blow for CSO'

"This is a devastating blow for CSO," said R Nagaraj, a professor at the Indira Gandhi Institute of Development Research in Mumbai. "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."

PC Mohanan, former NSC member and former NSSO chief, said that the MCA-21 database did not receive the scrutiny it should have been. Mohanan had resigned from NSC in December over the suppression of an NSSO jobs report.

'No comments'

The then chief statistician TCA Anant, under whose watch the GDP series was prepared, refused to comment, saying he was a member of the Union Public Service Commission now, and would not like to speak to reporters.