'Missing' Firms in GDP Calculation

The controversies regarding India’s GDP numbers, with 2011-2012 as the base year, seem to be not coming to an end. The Indian National Sampling Survey Office’s (NSSO) study, ending June 2017, revealed that 38% of the companies which are a part of the MCA21 database (the Modi government’s e-governance initiative) were missing. The study implied that the inclusion of data from such companies would grossly overestimate GDP figures.  

The Background

In 2015, the Central Statistical Office (CSO) of India issued a new GDP series, wherein the routine 2004-05 base year was replaced with 2011-12. According to Dr R. Nagaraj, such a revision usually leads to a slight expansion of the absolute GDP in the base year, keeping the growth rate constant. But this time, the absolute GDP was reduced slightly in the base year and the growth rate had an unprecedented rise.

There were significant changes in the methodology this time. The CSO had shifted to the latest global template, the System of National Accounts 2008, for calculations. Moreover, the income accruing to the Private Corporate Sector (PCS) was directly estimated using the Ministry of Corporate Affairs’ (MCA) statutory filing of financial returns, i.e. the aforementioned MCA-21. The PCS accounts for over one-third of the GDP, and has affected estimates of many industries. The CSO claims that GDP calculation through MCA-21, which is a larger database than the Annual Survey of Industries for Manufacturing used previously, better captures the economy’s value addition, especially of smaller enterprises and services activities. The critics, however, fear that this has led to a gross overestimation of GDP.  

The NSSO Survey

A recent report of the NSSO titled Technical Report on Service Sector Enterprises in India found nearly 38% of the companies surveyed using MCA21 database to be unusable for data collection purposes. Of this, 21% were “out of coverage” firms, 12% were designated untraceable and 4.5% were closed. Many of these companies according to Dr R. Nagaraj, are shell/fake/spurious entities that remain legally registered (but merely on paper) but do not produce goods and services. The only purpose is to help the owner hide the profits and, thus, reduce the taxable income.

Is GDP Overestimated?

Mr Pronab Sen, former Chief Statistician, disagrees with the fact that GDP is overestimated due to the data from the ‘missing’ firms. He explains that for the purpose of measurement of GDP, it is more important for the statisticians that the shell companies are submitting their balance sheets regularly to the MCA21. These firms are involved in some form of economic activity, and not measuring their output would mean severe underestimation of the GDP. The value creation is happening by some other company, but the transactions are being routed through these shell companies. Ignoring them would mean a part of the business of the registered company is being ignored, which is wrong. Hence, the GDP will only be correctly estimated if we include the data from the shell companies. However, the taxable income accruing to the private sector and thus the private savings will surely be underestimated.

Second, growth rates are measured over a period of time and are influenced by the regularity with which the companies file the returns. Thus, the fact that a large number of companies are not being measured affects the level of the economy, but not the growth profile.  

Moreover, the MCA21 database is a compilation of the audited financial returns filed by the companies. The returns are reconciled with the corporate tax collected by the Income Tax Department. Mr Sen explains that the audit data from MCA21 would always be better than unaudited data, the one collected from the field. The MCA data captures value creation by an entity which is a registered corporate. The value may be coming from the company itself or simply a book entry from some other company. This doesn’t matter as far as gross value addition (GVA) is concerned.  

MCA21: Foolproof?

The use of MCA21 database, however, does have its disadvantages. The presence of spurious firms creates low-level problems related to growth rates and gross value addition (GVA) by different sectors. For instance, a manufacturing company can create a shell company as a trading firm. The creation of a fake company of such kind will lead to some of the GVA by the manufacturing sector being counted as the GVA by the services sector.  

To consider the argument that all active companies under the MCA have filed statutory returns at least once during the last three years to be true will be a mistake. If it were true, there would at least be one year for which there would existent data for seven to eight hundred thousand companies, which has never been the case. For most years data is available for around three hundred thousand active companies. The estimates of gross value added for these three hundred thousand companies is inflated to obtain the GVA of the universe of 10 hundred thousand companies.  

There can be no denying the fact that MCA21 contains information from shell companies. The data from such fictitious units cannot be ignored to prevent underestimation. The only way to make the process of GDP calculation efficient and transparent would be to weed out these shell companies. The Ministry of Corporate Affairs (MCA) has started the process of geo-tagging the registered offices in the returns filed with the Registrar of Companies (RoC). Geo-tagging is the process of attaching geographical meta-data (exact latitudinal and longitudinal information) with an online return filing system, alerting the government if too many companies are registered on the same premises. The process of geo-tagging is still underway and it would be too early to comment on its effectiveness.

The debate on the inclusion of figures from shell companies for the calculation of GDP and the veracity of the GDP numbers is raging. There is a need for statisticians, economists and policymakers to sit together and find solutions to these technical issues related to GDP calculation. Additional steps need to be taken by the Income Tax Department and the Enforcement Directorate (India’s white collar crime watchdog) to clamp down on the operations of such spurious companies. The Justice Shah Commission, constituted in 2015, highlighted the role of such companies in money laundering, which is a punishable offence under Prevention of Money Laundering Act, 2002. A holistic government approach is necessary to fight the menace of shell companies.


Gurleen Kaur

I am a second year student pursuing Economics(H) from Delhi University. I am deeply interested in short stories in Punjabi and Sufi Poetry of Bulleh Shah. An environmentalist at heart, I firmly believe in building a sustainable society.

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