Editorials, GS-3, Indian Economy, Uncategorized

The truth about India’s growth

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Issue

Skepticism over the role of micro, small and medium enterprises (MSMEs) in the growth.

What happened?

Recently,  the official figures  have highlighted the enlarged size and faster growth of the private corporate sector in its new series.

Critics’ take on this
Critics claim this is the result of using the ministry of corporate affairs’ (MCA) newer database and an improvised methodology.

Arguments in favour of MSMEs as growth engines Arguments against MSMEs as growth engines
  • It’s small corporate enterprises, often overlooked, that are driving growth invisibly.
  • This 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.
  • 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.
  • According to this perspective, the revised GDP estimates have better captured the contribution of (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.
  • It is a well-known fact that a vast majority of private limited companies do not produce goods and services at all.
  • 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.
  • 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.

Conclusion

Based on above arguments, it is difficult to believe that  that the long tail of MSMEs with a minuscule output share can wag the economy.Therefore, the recent endorsements of the official growth narrative are perhaps premature.

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