How to identify manufacturing companies for GDP estimation
In a recent paper Amey Sapre and Pramod Sinha worked on the problems of gross value added (GVA) estimation for the manufacturing sector. One of the elements in the procedure is the identification of manufacturing companies from the MCA21 data. The GVA formula changes depending on whether a firm is classified as manufacturing or trading, and hence the classification of a firm into manufacturing or services is a critical question.
1. The use of reported ITC-HS codes can be misleading as the codes identify a product, and not a business activity.
2. For the purpose of GDP estimation, identification of companies has to be done every year. In cases where the ITC-HS codes are unavailable, using the NIC digits in the Company Identification Number (CIN) can also be misleading. The CIN code does not change in time, and does not not track the evolution of the firm over time.
3. As the top revenue generating products of a company can vary yearly, this will require the statistical authority to identify and re-classify companies on a yearly basis.
4. In the absence of a feasible solution, wrongly classified companies will show an incorrect GVA contribution. On the aggregate, both manufacturing and services sector will show a distorted picture. These difficulties are compounded by the fact that the appropriate deflator to be used when converting nominal to real differs between the two cases, and has taken substantially different values in recent years.
Presently, the extent of distortion in the GVA estimate is unknown. In the paper, we try to estimate the extent of misclassification by looking for the two cases (i) firms that operate as non-manufacturing entities, but have their NIC codes registered in a manufacturing activity and (ii) firms that are into manufacturing, but have their NIC code registered in any other economic activity. However, we need to go beyond measuring misclassification to algorithms for better classification. In this article, we propose one such solution.
- Amey Sapre is at the Indian Institute of Technology Kanpur and Pramod Sinha is a researcher at NIPFP.
