Business Today

BT Buzz: Latest GDP controversy exposes larger issues

A study conducted by the National Sample Survey Office has found that 36 per cent of companies that are part of the MCA-21 database were shell companies which cannot be traced, and thus hinting at a possible overestimation of the GDP.

twitter-logoDipak Mondal | May 11, 2019 | Updated 09:35 IST
BT Buzz: Latest GDP controversy exposes larger issues
Yet another case of alleged data fudging has come to haunt the government.

The question of data credibility has again come back to haunt the government this time in the form of quality of corporate sector data used for GDP calculation.

A study conducted by the National Sample Survey Office (NSSO) has found many holes in MCA-21 data used for GDP calculation. The study suggests that 36 per cent of companies that are part of the MCA-21 database were shell companies which cannot be traced, and thus hinting at a possible overestimation of the GDP.

This has given fodder to critics of the government, who have again raised questions on the credibility of the data that the Central Statistics Office (CSO) has been putting out under this government. The recent controversy comes close on the heels of the alleged suppression of periodic labour force survey and the release of back series data that lowered the GDP growth rate under the UPA era.

The recent controversy seems to have put the government in the back foot, even if some experts including the former chief statistician rubbish the brouhaha around the GDP data.

ALSO READ:FinMin says GDP overestimation due to MCA data a 'misconception'

Government's defence

A senior finance ministry official said on the condition of anonymity that the use of the MCA-21 database from 2015 was not a unilateral decision of the government but was recommended by the Rangarajan Commission, which reviewed the Indian Statistical System in 2001.

He says that the government started using MCA-21 data because the earlier system was even worse. "So, if you are now saying that the use of MCA-21 data is resulting in an overestimation of GDP, this was true for the data under the earlier government, too, as the earlier system was even worse," he says.

The Rangarajan Commission had recommended the use of data base maintained by MCA (then it was called the Department of Corporate Affairs) for measuring corporate sector's contribution to the GDP.

However, it had then pointed out the weaknesses of the data. It observed that there are more than five lakh companies (in 2001) registered in the Registrar of Companies (ROC) but the actual number of companies, which are operating, was not known. It did admit that "the situation seriously affects the reliability of various estimates". Even then the Commission has pointed out about 47 per cent of the registered companies filed their balance sheet with the ROC.

The commission had recommended a one-time census of all registered companies to create a frame by eliminating closed down and defunct companies should be conducted.

The MCA-21 database is called so as the RoC assigns a unique 21-digit Corporate Index Number (CIN) for the registration of companies.

Even as the government is not taking the full blame for the 'unreliability' of the GDP data, it is up to the CSO to come out clean on this.

ALSO READ:Incredulous data: Economists create own benchmarks to measure Indian economy

Misinterpretation of the NSSO report?

Meanwhile, the former chief statistician of India Pronab Sen feels the recent controversy around GDP data is unnecessary and the NSSO report has been completely misinterpreted.

He says that if you leave out shell companies, you would be under-estimating the GDP seriously for the very simple reason that wealth creation is going on in the parent company but it is showing up in the books of shell companies.

He explains: "Shell companies essentially are accounting companies that have been created so that the parent company can show its earning and expenditure in the books of account of a shell company and lower its tax liabilities. Essentially, the parent company is showing lower income by showing a part of their income in the books of shell companies."

So, if you don't pick up the shell companies you are not picking up the (real) wealth creation going on in the parent company.

Talking about the NSSO report, he says the NSSO report has been completely misinterpreted and it has nothing to do with the GDP calculation. "What the NSSO is necessarily saying is that there are active companies in the MCA which do not have a physical location. So, there is an address but nothing is happening there," he says.

According to him, the NSSO is necessarily saying that there are a lot more shell companies than what you had expected, but instead of picking on that people are picking up on GDP calculation.

ALSO READ:Leaving out shell companies would seriously underestimate GDP: Former Chief Statistician

Reliability of MCA-21

In an interview to Business Today in December last year, Injeti Srinivas, secretary MCA, has said that though the MCA 21 is a very robust system but there has been a problem of data reliability.

He had said that we have a situation where only 50-60 per cent of the companies were active and rest are not. We are removing the names of inactive companies; sometimes we are referring them as shell companies, from the Registrar of Companies.

Injeti Srinivas had informed Business Today then that in the whole process of deregistration of inactive companies, almost 5 lakh such companies had been identified. In the first drive, they deregistered 2.26 lakh companies and in the second they deregistered 1.05 lakh companies.

He said that data reliability issue would be fully addressed in version 3 of MCA 21 but that would effectively take two years to become operational.

ALSO READ:Need To Ring-Fence CSO

Larger problems with statistical system

The MCA-21 database has holes as pointed out by the NSSO study but it is still an improvement over the previous database.

In a roundtable conducted by Business Today to discuss on the issue of data credibility, most panellists were of the view that MCA-21 was an improvement over the previous system of measuring corporate contribution to GDP. However, they agreed that whatever the changes were brought about in GDP calculation, it was not communicated well to all the stakeholders.

Sudipto Mundle, a former member of the National Statistics Commission (NSC) and chairman of the Committee on Real Sector Statistics, which had prepared the back series data, said: "Earlier when there was a big change in the generation of GDP figures, there would be an explanation as to why it has happened. In this case, it did not happen. Whatever they produced, didn't clarify much."

Loveesh Bhandari, an economist and head of the think tank, Indicus Foundation, argues that the change in the data series was too fast. "When you are coming up with something new on a highly respected number, which was India's GDP estimate, and people are used to it, all kinds of economic models are using these numbers, suddenly you have this shift and a GDP which is ostensibly incomparable, you are stuck," says Bhandari.

Though he thinks there is a larger issue of the possible gaps in CSO due to lack of resources."We must accept the fact that CSO was not able to go deep enough into the data before it came out with a new series. And the main reason is CSO is heavily under-resourced, and CSO don't invest anything given the scale of economy we are going to have in the next five to 10 years. You cannot expect CSO to do all these new age things when it is not really investing," says Bhandari.

PC Mohanan, the former chairman of NSC, who resigned from his post over suppression of employment data, admits CSO lacks expertise in certain fields. "Many of us had said that there has to be a team of IT people to extract the data and also some cost accountants to understand what the data means. That actually did not happen. So the teamwork is missing in many of the operations, and we collect far too much data and never look at that data," he pointed out.

While the latest controversy with the GDP calculation points to gaps in the MCA data, it is probably yet another opportunity to take a hard look at the lacunas in the statistical system of the country and iron-out the issues once and for all.

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