Why small enterprises and not large companies are driving the new GDP series

New Delhi: Medium and small enterprises (MSMEs) are firing up India’s GDP growth, not the large listed companies which have seen bottomlines contract in the last few quarters. The proof of the prowess of MSMEs and their role in firing up the Indian growth story lies in the latest GDP figures released by the Central Statistical Office (CSO). Government data say India’s GDP grew 7.6 percent between January to March this year. That translates to 7.9 percent in a year, which makes us the fastest growing large economy in the world.  Captains of India Inc, various business chambers and economists have all expressed doubts over these growth numbers which paint a rosy picture of India’s economic growth under the Modi regime without adequate. Without going into the merits of these allegations, which have already been refuted by India’s Chief Statistician T C A Anant and other voices in government, it is important to note why a simple change in data collection and sample size might be the cause of all the heartburn. It would also be fruitful to know what is really happening to India’s economy and why so few of us have taken the trouble to understand the numbers. The large listed firms, which seem to define India Inc have, to be sure, seen tepid bottomline growth in the last few quarters as consumption has slowed. But if we look at the not-so-large companies, those in the middle rung, then the story is entirely different. It would not be incorrect to say that it is these middle-of-the-road firms which are driving India’s GDP. According to “India 2020: Consumption driven to investment led-Why and How?” report by Nikhil Gupta of brokerage Motilal Osawl, the galloping GDP growth is a result of inclusion of mid-tier companies in data sampling by the CSO. “Prior to the new GDP series, RBI quarterly survey of about 2,700 large companies was considered as the data source for corporate sector data. However, Ministry of corporate affairs (MCA) started collecting data on about 500,000 companies from 2011-12, which is used in the new GDP series. As against the broadly held belief of the large companies representing the true condition of India’s corporate sector, the inclusion of mid-tier companies from MCA database changes the picture substantially,” Gupta said in the report. That MSMEs could be the unsung heros of India’s economic prowess is also clear from this piece in the Business Standard newspaper which points to the peculiar aspect of India’s growth structure under the new Gross Domestic Product (GDP) series being the stellar performance of the micro, small and medium enterprises (MSME) in the manufacturing segment. With the bigger manufacturing companies struggling over the past few years, it was these smaller companies that provided the much needed fillip to manufacturing growth. The Reserve Bank of India’s analysis of the Ministry of Corporate Affairs database confirms this. Gross value added (GVA) by these companies grew at a staggering 17.3 and 16.2 percent in 2013-14 and 2014-15, respectively, dwarfing the value addition by their larger counterparts who grew at a modest 10.1 and 12 percent over the same period. Not just GDP growth, the nearly 40 million MSME units employing about 100 million people, directly and indirectly, are also the largest job providers in the country, according to this piece in the Hindu Business Line. These units contribute about 8 percent to the GDP, have a share of 45 percent in the country’s manufacturing output growth (Gupta of Motilal Oswal says their share has risen to 49%), and contribute 40 percent to the country’s exports. Gupta points out in his report that while the sales of RBI sample companies (which covers far lesser but larger, listed companies) grew at low single digits in FY14 and FY15, growth for the rest of the corporate sector was in high teens. Deceleration in case of ‘others’, companies not covered by the Ministry of Corporate Affairs and which account for 49% of total consumption, was marginal – from 18.4% YoY in FY14 to 16.5% in FY15. “Expanded coverage of the corporate sector explains higher GDP growth: One of the key revisions in the GDP data released by CSO last year was the use of new data source – MCA database – for estimating the corporate sector’s contribution to the economy. Earlier, the corporate sector’s contribution was estimated using the RBI study on company finances, which was based on some 2,700-odd listed companies and Index of Industrial Production (IIP). The MCA database covers almost 500,000 companies. Not surprisingly, data for the manufacturing sector has witnessed a marked upward movement post revision.” Put simply, we must get over our obsession with the most-tracked listed companies, captured by the RBI sample, since these are not be the real representatives of the economy. Once we have understood the importance of MSMEs in firing up India’s manufacturing though, we must look for ways to boost manufacturing as a whole. In a recent survey, the Federation of Indian Chambers of Commerce and Industry (FICCI) found a marked slowdown in manufacturing sector’s growth for the current quarter versus Q4 of FY16. This quarterly survey gauged the expectations of manufacturers for Q1 (April-June 2016-17) for thirteen major sectors such as textiles, capital goods, metals, chemicals, cement and ceramics, electronics, auto, leather & footwear, machine tools, food, tyre, paper and textiles machinery. Three in four respondents said they had no plans for capacity addition in the next six months, implying that the slowdown in private sector investments in manufacturing to continue. Policy uncertainty, poor demand conditions, high cost of borrowing, delayed clearances and cost escalation are some of the major constraints which are affecting the expansion plans of corporates. The current average capacity utilization is around 74% for Q4 FY16 which means roughly a fourth of India’s factories are lying idle.