Context

About a third of non-government non-financial companies in the services sector are not traceable is the finding of a National Sample Survey Office (NSSO) survey for 2016-17 that has just been released. Since such entities could be shell/fake/bogus companies included in the MCA-21 database of “active” companies used for estimating the gross domestic product (GDP), the new finding could imply that private corporate sector GDP is being currently overestimated, denting the official growth narrative.

The background

• Change in the base year – In 2015, the Central Statistics Office (CSO) issued a new GDP series with 2011-12 as the base year, replacing the earlier series with the 2004-05 base-year as a routine matter.

• Usually, the revision leads to a slight expansion of the absolute GDP in the base year, but its growth rate does not change, implying that the underlying pace of economic expansion in the two series has remained the same.

• Change in growth rate – This time was different, however. The absolute GDP size — the sum of the value of all (unduplicated) goods and services produced in a year — got diminished slightly in the base year, and its growth rates went up subsequently.

• Application of global template – Faced with public scrutiny and scepticism, the CSO defended the revision by claiming that it had followed the latest global template (the System of National Accounts 2008), applying improved methodologies to a newer and larger data set.

• Inclusion of MCA-21 financial returns – In a first, the new series estimated private corporate sector (PCS) GDP directly using the Ministry of Corporate Affairs’ (MCA) statutory filing of financial returns, MCA-21.

• Effect on industries  – Accounting for over a third of GDP, as the non-financial PCS now spans widely, the revision has affected the estimates of many industries and services. Hence the GDP debate has mostly centred on the PCS.

Screening and setback

• To redress the shortcoming, the CSO is committed to launching an annual survey of services (on the lines of the ASI).

• As a first step, the NSSO carried out a survey of non-government and non-financial companies/establishments in 2016-17.

• The NSSO report says, “About 45% of MCA units were found to be out-of-survey/causality

• The inference could be that such companies are likely to be shell/fake/spurious entities that remain legally registered (but merely on paper), without actually producing goods and services.

Impact of estimation

• The survey findings could bring down the growth estimates.

• However, those knowledgeable have dismissed such an apprehension on two counts:

  • One, shell companies add value to the economy, hence their deletion would underestimate GDP.

  • Two, as all active companies are said to submit their audited accounts at least once in three years, the contribution of shell companies is well captured in the MCA database.

• Both arguments seem questionable.

  • Shell companies, by definition, do not produce goods and services; they help the promoter/owner to hide profits or evade taxes/regulation.

  • The argument that all active companies under the MCA have filed statutory returns at least once during the last three years is a bureaucratic fiction.

Case for scrutiny

• In sum, the NSSO’s survey of active companies in the services sector discovered that 45% of them could not be traced or misclassified; hence they could represent or be shell/fake/bogus companies.

• The finding throws into sharp relief the poor quality of the MCA-21 data set, which has formed the backbone of the new GDP series.

• The NSSO survey results have added more questions about the beleaguered GDP series.

Way forward

As a first step towards dispelling the growing distrust in the new GDP series, the government should put up the MCA-21 data for public scrutiny and lift the opacity of the methodology used in estimating corporate sector output.