CSO Used Shell Companies’ Data in Calculating New GDP Series

According to a study conducted by National Sample Survey Organisation (NSSO), data of untraceable companies was used in calculating India’s new Gross Domestic Product (GDP) series. NSSO found that as much as 36% of companies which were deemed as “active companies” by Ministry of Corporate Affairs and used in GDP calculation, could ‘not be traced’ or were ‘wrongly classified’.

After adopting a new methodology for estimating GDP series, Central Statistics Office (CSO) in 2015 began taking corporate information from the Ministry of Corporate Affairs’ Mission Mode Project (MCA-21) database. Another key change introduced was that the ‘base year’ was changed to that of financial year 2012, replacing the old series’ base year of financial year 2005.

Fifteen percent of the firms in the MCA-21 list were either untraceable or were found shut. Another 21% were found “out of coverage”, suggesting they were no longer operating as service sector firms though registered as service sector with MCA. NSSO survey found that many identified companies didn’t maintain proper accounts on the basis of which enumerators could capture data on those firms.

Several economists have now questioned the credibility of the new method raising doubts about the possibilities of including data on shell companies in calculating national accounts.

In November last year, the government released GDP figures with noticeable variations from the previous estimations. For instance, average growth from FY06 to FY12 declined to 6.82% from 7.75% earlier when United Progressive Alliance (UPA) was in power.

Professor Arun Kumar, the Malcolm Adiseshiah Chair Professor at Institute of Social Sciences, says that the problem began when CSO launched the new series in a “great hurry”. “If the shell companies whose data was used have filed fictitious financial results, then it would severely impact the GDP figures,” said Arun Kumar. “The credibility of the new series is now under question adding to the suspicion that things are being manipulated in favour of the ruling regime (Modi-led BJP government). This adds confusion to both the public and experts and this episode should be seen as a caution for the future estimation of GDP series,” he added.

“GDP will be underestimated if shell companies transactions were not captured,” admits former Chief Statistician Pronab Sen of CSO. Responding on this matter, in an interview with Business Standard, Sen said- “The frame that was used by the NSSO was that of active companies. That some of these companies were shell companies was not unknown. But if I don't include these shell companies in GDP calculations, we would not be capturing all transactions in the economy. Almost all shell companies are in the services sector. These are more likely to be found in trade and professional services where the parent company creates shell companies to evade taxes.”

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