A latest National Sample Survey Organisation (NSSO) report has raised fresh questions over India’s gross domestic product (GDP) and national income calculation methodology. According to Mint, which first wrote about it on May 8, 2019, about 38% of companies, which the NSSO surveyed from the MCA-21 database of companies used for calculating GDP, could not be traced or were wrongly classified.
Here’s a primer:
What is GDP?
How is GDP calculated?
How is GDP calculated using the supply or production method?
How is GDP calculated using the income method?
How is it calculated using the demand or expenditure method?
What is real and nominal GDP?
What is a “base year”?
The new series has changed the base to 2011-12 from 2004-05. Every national accounts dataset gives GDP calculations for two years: 2011-12 and the current year.
When was the new series launched?
What are the main differences in the old and new methods to calculate GDP?
Also read: Opinion | 'How's life?' No, GDP doesn't answer this question
In the communication sector, telecom subscriber base was used in the old sector as compared to minutes of usage in the new formula.
What’s on now?
Now, the corporate affairs ministry’s MCA 21 records, a wide-ranging compilation of balance sheet data of lakhs of firms, is used.
The use of MCA 21 records for national income calculations have brought to light a segment of organised activity, which was earlier, for the most part, invisible. This is the lower end of the corporate segment. These are companies which are not listed in stock exchanges, and were virtually left out of national income calculations.
What is Gross Value Added (GVA)?
GVA, which is GDP minus taxes, serves as a more realistic proxy to measure changes in the aggregate value of goods and services produced in the economy.
Earlier, the IIP served as the primary metric to gauge manufacturing and trading activity. The problem was, it only counted the number of units produced and did not distinguish, between, say the value of a luxury car and an entry-level hatch-back. It is possible that factory output would have remained stagnant over a period of time, but its value would have multiplied.
One can keep selling the same number of cars, but keep improving the quality so the value goes up. An even better example than cars is computers. A purely output-based method would not be able to capture the innovations and the value additions in such products and industrial activity.
The GVA method also factors in value addition and economic action carried out by activities such as marketing. Such activity can be of a very high value in case of large FMCG companies.
What is the latest controversy surrounding the GDP data?
How has the government responded to this?
The Central Statistics Office (CSO) is currently in the process of undertaking the new base revision to 2017-18. The statistics ministry had commissioned the NSSO technical report for this purpose.
What could be the possible reasons for these companies becoming untraceable?
Out of the 6.7 lakh companies that were shuttered down, 10,640 companies were liquidated or dissolved; 6.2 lakh companies were declared defunct (and hence struck-off from official records); 22,532 companies were amalgamated or merged with other companies; 10,086 companies were converted to Limited Liability Partnership (LLP) and 4,794 were converted to LLP and dissolved.
The 6.22 lakh `defunct’ and struck-off companies accounted for 33% of the 18.6 lakh registered companies as of February 28, 2019.
When is a company’s name struck off official records?
The ongoing move to shutter down such companies is part of a drive to remove entities that do not contribute to an economic activity and are rather a burden on the system. The corporate affairs ministry is also examining companies’ data to see if they are involved in tax evasion or money laundering.
The ministry of corporate affairs data also showed that nearly two-thirds or 11.9 lakh companies are active. Active companies carry out normal business and trading activities, generating income and meeting the basic requirements such as filing financial statements. Inactive or shuttered companies, therefore, may be one of the reasons why these could be showing up as `untraceable’ in the NSSO’s technical report on MCA 21 data.
What has the government said about the likely impact of these untraceable companies on GDP calculations?
What are experts saying on the issue?
What are the other criticisms about GDP estimates using the new method?
Owing to the limitations of the availability of data, in some areas either splicing method or ratios observed in the estimates in the base year 2011-12 have been used for the previous years. The big question is: How can you extrapolate MCA 21 data for previous years when the data itself started getting collated only in 2008 and has undergone several rounds of changes in the later years.
Why the criticism?
Likewise, real or inflation-adjusted GDP growth rates of 9.3%, 9.3% and 9.8% in 2005-06, 2006-07, 2007-08 respectively were revised downwards to 9.9%, 8.1% and 7.7%.
According to the new series, GDP growth rate dropped to 3.1% in 2009-10, compared to the previous estimates of 3.9%, mirroring a deeper impact of the global financial crisis of 2008 on the Indian economy than previously thought.
Why the sharp drop in GDP growth rates?
Growth rates in the primary sector fell from 5% in 2005-06 to 2% in 2011-12 against 4.6% in 2005-06 to 4.4% in 2011-12 in the previous estimates.
Secondary sector growth rates fell from 10.2% in 2005-06 to 6.6% in 2011-12 in the new series compared to 10.7% and the 8.5% respectively.
Tertiary sector growth rates fell from 9.1% in 2005-06 to 5.9% in 2011-12 according to the back series against 10.9% and 6.9% respectively earlier.
Why is there such a big difference?
How does GDP data factor in India’s bustling informal and black economy that operates outside regulatory boundaries?
What about the rural economy?
How is labour income estimated in GDP calculations?
What about estimates of value of trading-related services?
How is income generated by the financial sector estimated?
In the new series, the coverage of financial sector has been expanded by including stock brokers, stock exchanges, asset management companies, mutual funds and pension funds, as well as the regulatory bodies, SEBI, PFRDA and IRDA.
What about income estimates of local bodies and autonomous institutions?
When is the GDP data released and how often is it revised?
The first provisional annual estimates are released on the last working day of May. So, for 2018-19, the provisional GDP estimates will be released on May 31, 2019.
It will be later revised with fresh data and the first revised estimates for 2018-19 will be released on the last working day of January 2020. It will again be revised with more updated data and the second revised estimates will be released on the last working day of January 2021.
Till the release of provisional estimates in any year, the estimates are based on indicators such as IIP, wholesale price indices, core sector data on steel, cement, electricity, revenue expenditure, GST data, trade data on imports and exports, consumer prices, among others.
The estimates based on indicators are reworked when the corresponding data source becomes available. By the time of the Third Revised Estimate, the coverage and completeness in the data sources are almost final and no further revision takes place.
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