Prithwis De: Is the services growth for real?
Before we decide, verifiability and validation are sorely called for
| It is a matter of some concern that the largest and fastest growing component of GDP "" services "" is also the most difficult to quantify. Physical production is relatively easy to measure, so agricultural and industrial GDP numbers can be validated with estimates of production. |
| This obviously isn't the case with services. Even with every precaution being taken to ensure good estimation, the basic problem of having an observable variable that can be used as a foundation cannot be wished away. |
| In effect, the perception of rapid overall growth in services is a matter of faith "" in whatever data are available and the methods by which these are extrapolated to reach the aggregates. |
| This article makes an attempt to verify the quality of services data available in National Accounts Statistics (NAS), published by Central Statistical Organisation (CSO). |
| Taking data from 1993-94 to 2003-04, the levels and growth patterns of services sector emerging from NAS data have been compared with those emerging from corporate data. |
| NAS provides aggregate data on services sector; the Prowess database, published by CMIE, was used for information on companies that can be classified within the services sector. |
| The services group in Prowess includes financial services, hotels and tourism services, recreational services, health services, trading services, transport services, communication services, information technology, media, and miscellaneous services (storage and distribution, and business consulting, among others). |
| Using the data available in Prowess under services category, we measure the value addition of services companies. |
| The important question is whether the level and the growth in value addition of service sector companies can be taken as a proxy for services sector GDP and its growth available in the NAS. |
| The data on services companies is in nominal terms. The database provides information for about 3750 companies in the services sectors. |
| The value addition of services companies is computed by adding profit before depreciation, interest and tax with wages and salaries of those companies in services category available in Prowess. |
| This measure indicates the value addition made by basic factors of production such as workers, entrepreneurs, capital and so on. In order to compare it with the value added in services, available in NAS, nominal values of services have been taken. |
| While the value addition of services mentioned in NAS has increased consistently, the value addition of services companies in Prowess has decreased in 2003-04. |
| Moreover, the value addition of services companies mentioned in Prowess represents only between 16 per cent and 23 per cent of the value addition of services in NAS during the period. |
| The annual growth in value addition of services available in NAS have been compared with the same in Prowess. Though the correlation coefficient between the growth in value addition of all the services companies in Prowess and the growth in value addition of services in NAS is positive, it is not too strong. The correlation coefficient comes out to be 0.54. |
| The growth in value addition of all services companies is more volatile than the same in NAS. The growth in value addition of services available in NAS varies from 10 per cent to 20 per cent, whereas the growth in value addition of all the services companies in Prowess varies from as high as 43 per cent to as low as minus 11 per cent. |
| The growth in value addition of companies classified as services in Prowess averages about two percentage points more than the same in NAS, although it is more volatile. |
| The standard deviation for the growth in value addition of services companies in Prowess is 13.3 per cent. On the other hand, the standard deviation for the growth in value addition of services in NAS is just 3.3 per cent, with an average growth rate of 14.7 per cent. |
| This suggests that the growth patterns emerging from NAS data are more homogenous compared to the same emerging from corporate data. This might be because of the huge volatility in the growth exhibited by the company data. |
| While the compound annual growth rate (CAGR) in value addition of services companies in Prowess is higher during 1993-94/ 1997-98, it is lower during 1998-99/ 2003-04, compared to the same in NAS. |
| Moreover, lower CAGR in value addition is exhibited by both NAS and corporate data during 1998-99/ 2003-04 than during 1993-94/1997-98. |
| Therefore, it can be inferred that the level and the growth in value addition of services companies do not replicate the level and the growth in value addition of services in NAS. |
| Why are such disparate trends seen? One reason is, clearly, narrower representation of the services companies to the overall services sector. |
| But a broader concern emerges here. The Prowess data obviously reflects the performance of the corporate segment within the services sector. The value addition of services companies in Prowess accounts for about 20 per cent of the same in services available in NAS. |
| Eighty per cent of value added in services, therefore, comes from the non-corporate and informal sectors. This implies that around 40 per cent of GDP (services in total account for slightly over 50 per cent of GDP) is being estimated in ways that do not provide for any separate validation process. |
| More so, the behaviour of the 20 per cent of services, which is amenable to some kind of validation, does not necessarily conform to the larger picture. |
| Shankar Acharya pointed out the underlying infirmities in the available NAS data on services in an article in this newspaper (December 23, 2003). |
| According to him, the actual estimation of some services is indirect and is based on lagged information and imprecise assumptions. |
| No data for the actual year, say 1998-99, is used by the CSO in estimating value added in certain services in that year, that is, 1998-99. |
| In short, there appears to be something of a disconnect between the growth patterns emerging from NAS data with those emerging from corporate data. |
| This raises some questions about the apparently limitless capacity of the services sector to continue to grow at 8 per cent or more, year after year. Verifiability and validation are sorely called for. |
| The writer is an economist with CRISIL. This is a modified version of an article that appeared in the CRISIL Ecoview of April 2005. |