 Hello and welcome to NewsClick. I am Paranjoy Gohar Thakurtha and we are going to discuss the controversy about India's estimates of GDP or cross-domestic product on national income. And of late, there's been a lot of controversy about these numbers. I'm very happy to welcome Professor R. Nagaraj. He is, he teaches, he's a professor at the IGIDR in Mumbai. That's the Indira Gandhi Institute of Development Research in Mumbai. Thank you very much Dr. Nagaraj for giving us your time. When Dr. Arvind Subramaniam, who had been the country's chief economic advisor for four years, came out with a report, a paper titled India's GDP Misestimation, Likelihood, Magnitudes, Mechanisms and Implications, which was published by the Center for International Development at Harvard University. There's been a huge human cry. The headline of that report was that between 2011-12 and 2016-17, India's annual rate of growth of GDP had been overestimated to the tune of about two and a half percent. So instead of being, instead of seven percent which was being claimed by the government, it may actually have been four and a half percent. Soon after this paper was published, and Dr. Arvind Subramaniam wrote a report in the Indian Express newspaper, the economic advisor to the Prime Minister's Economic Advisory Council, headed by Vivek Dev Roy, including Ratan Roy, who heads the National Institute of Public Finance and Policy, economist Surjit Bhalla, and two outsiders. Dr. Arvind Virmani, the former chief economic advisor and Charan Singh, they said, they completely rejected the methodology followed by Arvind Subramaniam and said that the new GDP series meets international standards laid down by various United Nations bodies, that it's a far better reflection of reality than the old series, and that his estimations would not stand the scrutiny of academic or policy research standards, that it was not rigorous in terms of specific data sources, description and alternative hypotheses. So Professor Nagaraj, I will request you to demystify the controversy and try and explain in as simple a language as possible, what is this controversy all about? Controversy is about the the growth rate of India's GDP. This started in 2015 when the Central Statistical Office came out with the new series of GDP with 2011-12 as the base year. This revision was due and this is a routine matter with statistical office of any country. India has been revising GDP at fairly regular frequency. Usually and also India has always followed the international standard that is the SNA, System of National Accounts, laid down by the United Nations. So United Nations standard is basically a broad template to which every country tries to adapt. So it is not a mandate, it's a template which every country tries to adjust or suit it for its requirement. So following the historical tradition, the revision was made and the first set of results were published in 2015, early 2015. What happened is the following. GDP in its absolute size declined by about 2 percentage points and its growth rate increased quite substantially for 2 or 3 years for which the estimates were prepared. Usually when the base year revision happens, the absolute size of GDP enlarges a little bit because newer areas are brought in or areas which are not earlier covered adequately are brought into the ambit of the national income estimation. So absolute size of GDP usually expands a little bit but growth rates usually do not change that has been our past experience of over 7 decades. However this time what we found was the absolute size of GDP in the base year that is 2011-12 declined by about 2 percentage points and the growth rates increased fairly significantly and in particular sectors such as manufacturing the growth rate swung from minus 0.5 percent in 13-14 to plus 5.5 percent. So this kind of swing in growth rates of specific sectors is something which is unheard of to best of my knowledge. So obviously there was considerable public criticism or public inquiry into why such large changes have happened. Moreover such large changes which happened which was noticed in 2015 were quite at variance with other macroeconomic correlates such as growth in credit, bank credit or capacity utilization. So there were questions by public and data users that how can the base year revision lead to such large changes in growth rates. So that was the origin of the of the debate. So coming to the present what Arvind Subramaniam has done is to come up with a proxy for GDP because he has not used the official methodology to come up with an alternative GDP but a but a proxy for GDP using macro correlates like electricity consumption, credit growth, capacity utilization etc. So he started with about 17 variables which correlate with GDP and later he narrowed it down to four variables and he makes a statistical estimation and came up with the result and according to him the actual growth rate is closer to 4.5 percent not 7 percent and that is the background. So obviously the officials are do not accept these numbers that is why the Economic Advisory Council has sought to dismiss this exercise completely and discredit it in many ways. So that is the that is the background of the controversy. Professor Nagaraj, I'm going to come back to you on these estimations made by Dr. Arvind Subramaniam and the Prime Minister's Economic Advisory Council refuting his views but before I do that let me take a few steps back. You yourself had written a detailed article in the Economic and Political Weekly where you had questioned the use of the data of the MCA the Ministry of Corporate Affairs and the shift from a volume-based data to a financial-accounts-based database and subsequently this became a huge controversy if you will I recall at that point of time you were accused of betraying the trust of the committee that you were supposed to be on by leaking its internal proceedings at that time you were in the eye of a storm but once again when we look at the Ministry of Corporate Affairs data and the fact that one estimate says a lot of the data that is being used as much as one-third of the companies that are being used are so-called shell companies. Now when you contrast and compare the data which is put out by the Ministry of Corporate Affairs with the data that comes out in the ASI or the annual survey of industries you you come across a lot of mismatches and discrepancies so I'd like you to explain what are the issues when you look at the data from the Ministry of Corporate Affairs and the the annual survey of industries and and looking at at at the huge controversies about so-called shell companies in the sample. Yes please. Right yes I was I was the one I was the first person to flag the issues with MCA data let me explain what changes happened earlier we were using annual survey of industries data for estimating GDP of of manufacturing sector or the organized large factories manufacturing sector there are problems with it because there is a delay in getting the data by about two years up to that period the volume data as it is called the index of industrial production data is used as ASI data was could become available the ASI data is is used and IIP data is is removed this was roughly speaking the procedure earlier but in the in the in the new GDP series they have practically abandoned the ASI and started using the MCA database on on on on the face of it it is a is a right move because ASI the ASI I mean the the MCA data consists of over five four five lakh companies data so this is considered a much larger database than the ASI data and the company results come out every quarterly though unordited so so on the face of it nobody can deny that using a larger data say a base which comes more frequently is a desirable desirable option and which is what the official agency is used we have no I no difficulty up to this point but the question comes how how good is this this MCA database is large database necessarily a better database that is the critical question and this database has been used without adequate testing and looking it closely into what it really tells us and many of us starting with me we felt that the use of this data and there is a method of what we are multiplying it for the universe of companies both the data set and the methodology have led to an overestimation of the corporate sector GDP so this is an issue which we raised in 2015 but we did not have any evidence to show what could possibly be wrong with with the data or the idea look the MCA database could have lots of shell companies that we could only we could only we could only speculate but we did not have hard data in fact sir it is pretty astonishing if true that as much as one third of the companies in that in that MCA database that is being considered while calculating or extrapolating the GDP numbers should be so-called shell companies kindly explain how this could have happened see let me explain see that as of today there are about 1.8 million registered companies which means any company which wants to operate in the country in the under the corporate sector has to register under the companies act and there are 1.8 million of such companies out of which about about 0.8 million do about which we know very little I mean they may be working not working then we have a list of about 1.1 million what the MCA calls active companies which by definition supposed to have provided annual reports at least once during the previous three years by the way this is a statutory filing every country by the law has to file returns every year but a large proportion of companies do not really do it so the list of active companies is that list which consists of companies which claim to have been submitting annual reports at least once during the last three years so this is the this is considered as working companies by MCA and the CSO and the this is the universe of companies for which the CSO estimates GDP so many of us have felt that this the number of actually working companies could be a small fraction of this 1.1 million companies so but we never had a base we did not have hard evidence on that recently the NSSO came out with a report of the sample survey of service sector companies when they when the NSSO took this the universe of companies or working companies list given to them by CSO and out of which they drew a sample of about 35,000 companies by following the standard statistical procedures and they and they verified before going to the field that they exist but when the officers went to actually correct the data they found that as Perangia right now said that one third of the companies could not be traced or were misclassified or were address not found or the entrepreneurs not willing to sign the information they have provided or refuse to provide any information so in effect 35 what one third of the companies did not provide information because they did not exist or they were misclassified okay so that is the that is the crux of the problem and okay no this I think by any by any statistical standards I think this is a serious matter unfortunately I am unfortunately Dr. Vivek Debroy writing about the the MCA he said a few dead horses do not make a difference I was aghast to read this by a very distinguished economist if one third of the sample could not be found or traced would you dismiss it as a few dead horses I am I was appalled to that I would be happy if Dr. Debroy clarifies what he meant so this is the level of of not tracing the companies so if the companies do not exist and we are making an estimate for them that therefore there is a good chance that the GDP estimates are overestimates all right Professor Nagaraj I am going to ask you a few questions and if you can try and answer these in a I'm okay first you do look at the camera when you speak and not at me no problem but I'm saying I want you Professor Nagaraj to demystify some of what you have written and I'd like you to explain this specifically on the data of the Ministry of Corporate Affairs firstly is how do you deal with widely diversified companies do you want to say you take the largest company in the in the private sector which is reliance industries limited it's into a wide range of sectors from retail to petrochemicals to telecommunications and so on and so forth now that's one question the second issue is what you describe as the blow up factor I'd like you to explain how you account for this you know I mean the paid up capital of the active companies how do you blow it up because the central statistics office the CSO have said the blow up factor has not varied significantly since 2011-12 and therefore whereas you have argued that this has affected growth they have argued that the impact has been negligible but at the same time we see considerable discrepancies as you rightly pointed out in 2013-14 the growth is above 5 percent according to the new series whereas the old series says it's negative at at least the manufacturing so I'd like you to demystify this and explain to me your views vis-a-vis the views of the CSO yes when you use the company data we have this this problem of of diversified companies I mean yeah I mean Paranjha mentioned about reliance which is a right example which under which industry will you classify them this is a problem of what this classification of companies in industries and this is a serious issue you see when a company is registered they are given a SIM company a corporate CIN a corporate information number it's a and which specifies I think it's called company information number company yeah company information number yeah okay so that specifies to which industry this company belongs based on the articles of association okay initially when they are so but the companies can change their production lines so maybe reliance is still classified as textiles maybe their most of output today comes from petrochemicals so whether these changes have been made I don't know but I presume that some of these are taken care by CSO when they classify companies okay so but this could still be a problem for a large number of companies yeah that is that that's a that's a that's an issue which the the statisticians of CSO claim that they have they have managed it and they keep updating the these these this class this classification so okay I trust the the officials that they they do to the best of their ability okay but the other issue you mentioned about the blowing up is a is a is a more serious matter okay about SIM they what this leads to is mis mis classification of companies leads to differences in distribution of output across industries but overall GDP growth rate may not get affected because all the companies are in in the in the list but the blowing up factor blowing up factor could be a more serious one I will will explain see in any in any any sampling procedure so when you have a when you have a large universe statisticians to what they call scientific sampling and the sample estimate they prepare estimate for the sample which are multiplied or blown up to the universe of companies or what universe of so in this case as I said we have about 1.1 million active companies but the number of companies for which the government claims they get annual reports is about 6 lakh companies so and the government's claim is that these 6 lakhs companies account for 85 percent of of the paid up capital so even if there is some some mistakes or some errors in the blowing up that would only account for about 15 percent of the value addition or the 15 percent of GDP and even that will affect only the levels not the growth rates I have a different take on this the number of companies for which the CSO is able to get data as from from various sources we have we have shown is is about 3 lakh companies and we do not know how it has increased over time and we do not have information on the paid up capital every year and secondly the when they say a company's active company whether it is actually active company or a deregistered company we do not know so many of these problems with the sample with the with the sample they have makes us suspect that the problem is not as simple as the officials have made out made it out to be it had it been I mean in any in any statistical setup if you are not getting data for 15 percent of the companies and they are I mean multiplied to get those 15 percent there would not be any problem it happens in number of other instances but we are not sure if it is just a question of 15 percent okay what we are bothered about is that the basic data for which they have is for much smaller number of companies and the and the and the blowing up could be varying from year to year okay and the number of active companies changes from year to year so all given all this we are not sure what is the sample size what is the what is the sampling fraction and what is the universe so this all this leads to enormous variability which no statistician would would accept it to be scientifically correct well professor Nagaraj we conclude the first part of our interview with you at this juncture we will continue our discussion in the second part of this interview and all those of you who are watching this program you are viewing professor R. Nagaraj of the Indira Gandhi Institute of Development Research Mumbai demystifying explaining why India's statistics why the credibility of India's numbers for gross domestic product national income have descended to this level and the huge controversy that has been raked up on account of the claim made by the former chief economic advisor Arvind Subramaniam that in the period in in the period which is a period that both the united progressive alliance government as well as the Narendra Modi government the NDA government that between 2011-12 and 2016-17 India's actual rate of growth of gross domestic product was perhaps four and a half percent and not seven percent there are many more issues that I'm going to discuss with professor Nagaraj keep watching news click and wait for the second part of this interview thank you for being with us