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5 factors that led to a rise of corporate profit to GDP ratio to a 10-year high – Moneycontrol

The combined net profit of listed companies that declared their results by last weekend rose by 57.6% to Rs 5.11 lakh crore in 2020-21. As a result, the share of corporate profit in India’s gross domestic product (GDP) hit a 10-year high of 2.69% in the last financial year.

According to an analysis of corporate performance vis-à-vis the GDP since the global financial and economic crisis of 2008-09 in the Business Standard newspaper, the ratio was at a record low of 1.6% in 2019-20 while it was the highest in 2010-11 at 3.2%.

The ratio of corporate revenue to GDP was estimated at 34.4% in 2020-21, an improvement from 33.6% in the preceding year but lower compared to 35.7% in 2018-19. The ratios were calculated for a sample of 1,054 companies that had declared their results for the financial year 2020-21 or calendar year 2020 by the last weekend. These ratios may change when the results of more listed companies are available.

Here’s a look at factors that contributed to the rise of corporate profit to GDP ratio to its highest in 10 years, even as their sales revenue growth contracted in the first two quarters and barely grew in third.

1. Contraction of the economy due to the lockdown

This is basic math. The size of the Indian economy is used as the denominator for calculating the ratio and the sum of corporate profits as the numerator. The denominator – the Indian economy – had contracted during the year while the numerator – corporate profits – grew. In nominal terms, the size of the economy contracted 3% to Rs 197.46 lakh crore in 2020-21 from Rs 203.51 lakh crore in the previous year, according to the provisional estimates of GDP published by the National Statistics Office.

The economy contracted due to a harsh national lockdown between March 25 and June 7, during which period manufacture of essential goods and provision of essential services were only allowed. Growth was also affected by the disruptions caused to the supply chains and logistics by the lockdown. Global trade also suffered, as factories were kept shut and trading partners too had their version of lockdown for varying periods to contain the pandemic. Labour shortages across countries also hurt economic activity.

2. A boost from cheaper commodities

Nothing slumped like crude oil during the pandemic. Global prices fell to 18 year low of $21 a barrel in April 2020, as manufacturing activity and mobility declined worldwide due to measures to contain the virus. The restriction on international travel and a decline in freight also depressed demand for petroleum products and therefore its prices. Plastics too became cheaper with the fall in crude oil prices.

Metal prices fell in the early months of the pandemic. Iron ore, copper, aluminium, zinc and nickel became cheaper. The decline in the prices of metals, plastics and crude oil helped bring down input costs for companies. However, the selling prices were mostly unchanged. That helped corporate profits grow. Commodity prices started climbing when Chinese companies stepped up buying up commodities as their economy began to expand.

3. Price recovery helped commodities companies

While the fall in commodity prices benefitted the user industries, the firming up of prices gradually from June helped revenue and profit growth of the metals and mining companies. Commodity prices in the domestic market closely follow the movement in international prices. Steel manufacturers saw their profits soar as consumers paid higher prices. Exporters of iron ore too gained from the Chinese demand – the value of iron ore exports climbed by more than 85% in 2020-21. Exporters of steel products, copper and copper products and zinc and zinc products also benefited from an increase in prices and global demand.

4. Cheaper capital lowered interest cost

The Reserve Bank of India adopted a very accommodative stance to support businesses and boost the economy. The policy repo rate was reduced from 5.51% to 4.40% on March 27, 2020 and further to 4% on May 22, 2020. It continues to be at that level, despite the risk of inflation, as supporting growth is a priority. The lower cost of borrowing enabled companies to reduce the expenditure on interest, which then boosted the net profits. Interest costs are among the significant costs for most companies.

5. Fall in other operating expenditureMost companies implemented a range of measures to cut costs after the lockdown was imposed. The previous financial year (2019-20) had been challenging as the economy had slowed and corporate profits had dipped. So, employee costs were reduced by downsizing and/or cutting compensation packages. Running cost of offices – which include utility bills, transport and cafeteria – fell as employees worked from home. Many companies gave up some part of their real estate space while others renegotiated rentals.