Is India’s impressive growth rate accurate or do the official figures finesse the on-ground reality? The ongoing debate has highlighted a fair amount of doubt on the issue—centering on the enlarged size and faster growth of the private corporate sector in the new series. Critics claim this is the result of using the ministry of corporate affairs’ (MCA) newer database and an improvised methodology. But other commentators are now taking up a new—and unlikely—narrative: it’s small corporate enterprises, often overlooked, that are driving growth invisibly.

That narrative is based on the Reserve Bank of India’s (RBI) release of the combined balance sheet of 237,000 non-government non-financial (NGNF) private limited companies accounting for 23.3% of paid-up capital of the private corporate sector, obtained from the MCA. This is a significant and welcome development, allowing for a closer parsing of the official real annual GDP (gross domestic product) growth rate, up to 7.6% in 2015-16 from 5.4% in 2012-13.

The data set consists of the companies that have filed their financial returns with the MCA, a statutory requirement under the Companies Act. RBI’s analysis of the combined balance sheet shows an overall improvement in the output and financial performance of these firms over three years ending 2014-15.

This has been used to endorse the official growth narrative and question the critics’ scepticism of the new GDP series. For instance, Tulsi Jayakumar has in this space said that the sales of these companies have grown at 12% in 2014-15 in nominal terms, up from 8.7% in the previous year. Hence, she argues: “the new data... points to the new engines for the India growth and equity story—namely, the micro and small enterprises. The government and RBI will need to help them find their rightful place in the sun." In other words, the revised GDP estimates have, in Jayakumar’s opinion, better captured the contribution of micro, small and medium enterprises (MSMEs) in the corporate sector that were inadequately counted in the earlier National Account series, as the older series concentrated on large-sized public limited companies’ output.

In an interview last year (The Times of India, 15 June 2015), India’s chief statistician had expressed a similar view: “There is a large invisible corporate segment, which we were not adequately describing in the earlier series. We were partially describing it in manufacturing through the Annual Survey of Industries. So, there is recognition that there is a need to get better information on this segment as a large part of government policies are aimed at this segment. The 5,000 listed companies are typically not the principal focus of promotional policies."

Does RBI’s analysis really support this view? True, MSMEs’ (or NGNF private limited companies, to be precise) absolute numbers are staggering, but what is their share (or weight) in the domestic output? To find this out, gross value added of these companies is estimated using MCA data. In 2013-14, for which complete data are available, MSMEs constituted a mere 2.1% of domestic output, or 6.5% of non-financial private corporate sector output (that is, gross value added at current basic prices as per National Accounts Statistics 2015).

Arguably, the combined balance sheet of 237,000 NGNF companies for 2013-14 forms little over a quarter (27.7%) of “active companies"—which are defined as those registered with the MCA, net of closed companies, dormant companies, inactive companies, etc., (see the table on page 19, MCA Annual Report 2015). Assuming, hypothetically, that all the active companies are in fact producing goods and services regularly, the MSME sector’s share would rise to 7.7% of GDP or 23.4% of non-financial private corporate output. However, it is hard to believe that a dispersed sector accounting at most for 8% of GDP could be the engine of the purported growth acceleration when the rest of the economy barely displays much dynamism.

Further, there are more serious reasons to believe that the above figures are unrealistic. It is a well-known fact that a vast majority of private limited companies do not produce goods and services at all. Large swathes of such companies are spurious, bogus, fictitious and shell companies that hardly contribute to domestic output, and rarely, if ever, file their audited balance sheet with the MCA. This poses a problem in estimating private corporate sector output, as there are no even remotely reliable estimates of the number of regularly functioning companies. (For details, see R. Nagaraj, “Size and Structure of India’s Private Corporate Sector Implications for the New GDP Series", Economic and Political Weekly, 7 November 2015). This is amply demonstrated by the fact that with its best efforts—including a threat of de-registration a few years ago—the MCA was to able to compel a little over 500,000 companies to submit their statutory returns, for just two years.

Granting somewhat more realistically that one-half (instead of a quarter) of the active companies in the MSME sector represent genuine enterprises, then the sector’s contribution rises to 3.8% of GDP or, 11.7% of non-financial private corporate output.

If the foregoing arguments and estimates are correct, then the critical question is this: is it believable that the long tail of MSMEs with a minuscule output share can wag the economy? I wonder. Therefore, the recent endorsements of the official growth narrative are perhaps premature.

R. Nagaraj is a professor at Indira Gandhi Institute of Development Research, Mumbai.

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