The halting recovery of the Indian economy from the Covid pandemic received an unexpected blow from the Ukraine war. India’s corporate world is now struggling to cope with this double-trouble that has become a new challenge.
In the second part of this series Covid Response Watch traces various trends in the corporate sector during the pandemic.
The money kept flowing
On the whole, there was no dearth of funds for Indian corporate houses during the pandemic. Over the pandemic, the level of borrowings had gone up and corporate indebtedness had increased.
Despite loss in revenues, many companies had to keep them running by taking loans and hence borrowings through short-term commercial papers of 1-year maturity increased. Only the overseas borrowings of the Indian companies slightly came down, probably because there was a growing sense of risk aversion in the global capital markets and also because an eroding Indian rupee made overseas borrowings costlier for Indian companies.
Despite sizable cuts in the corporate tax in September 2019, the increase in FDI in 2020—21 was a meager 2.6% only though it increased sharply by 59.1% in the second pandemic year of 2021—22 over 2020—21, implying that foreign investors had overcome their reluctance and found India an attractive destination for FDI. In absolute terms this increase in FDI by Rs.240,750 crore was nearly equal to the total net profits of the corporate sector at Rs.250,460 that year and hence substantial. Still, this huge FDI was not adequate to propel the Indian economy and the corporate sector to a higher growth path.
Government bonanza for the corporate sector
Massive cuts in corporate tax in September 2019, of course, preceded the onset of the pandemic and were primarily aimed at reviving the economy from the slowdown that was already underway for a few years.
After the pandemic set in and the lockdown was declared, anticipating that the pandemic would further precipitate a deep recession in the economy, the government started offering more generous concessions to the corporate sector through sectoral tax-waiver incentives and waiver of bad loans/NPAs of sick companies, Productivity-Linked Incentives (PLIs) and other sops. The RBI also announced a package on 27 March 2020 in an unscheduled monetary policy announcement. Below, we are giving details of the volume of these concessions and their growth impact.
The main concessions are:
- On 20 September 2019, Finance Minister Nirmala Sitharaman announced cuts in corporate tax rates. The basic corporate tax rate was cut from 30% to 22% and for new firms it was reduced from 25% to 15%. The tax cuts benefited the companies to the tune of Rs.1.45 lakh crore.
- The government offered basic customs duty concessions to imports by corporate firms to the tune of Rs.127,275 crore in 2020—21 and Rs.1,03,529 crore in 2021—22.
Besides the corporate tax cuts and tax waivers, the corporate sector enjoyed some other concessions:
- Export profit from a company set up in an SEZ is eligible for tax exemption of 100% for the first five years, followed by a partial tax exemption of 50% for the next five years.
- Power sector firms and some other infrastructure companies are entitled for tax exemption of 100% of profits for the first 10 years out of any 15 (or, in some cases 20) years of operation.
The 27 March 2020 package of the RBI comprised:
- A decrease of 75 basis points (bps) in the policy repo rate and 100 bps reduction in cash reserve ratio (CRR) for banks;
- Liquidity support to the corporate sector through targeted long-term repo operations conducted with the banks (i.e., opening special windows for lending support to banks at relatively stable rates);
- A moratorium on loan payments for three months (which was further extended); and
- Easing of working capital financing norms.
While the 2019 corporate tax concession and customs duty concession in the two pandemic years of 2020—21 and 2021—22 alone worked out to Rs.3.75 lakh crore, if we include the other concessions like sectoral tax-waiver incentives for SEZ companies, green energy companies, and vaccine manufacturers and pharma companies engaged in Covid-19 related production and waiver of bank NPAs of some select corporate forms etc., the total sops would work out to around Rs.5 lakh crore.
And that roughly matches the total net profits of the corporate sector in the two pandemic years. In other words, it amounted to “doubling” of the profits of the corporate sector in those two years.
Pro-corporate bias of the Modi regime
The pro-corporate bias in taxation under the Modi Government was evident from the fact that between 2014—15 when Modi came to power and 2021—22, while the income-tax collection increased by 117% from Rs.2.6 lakh crore to Rs.5.6 lakh crore, the corporate tax collection increased more modestly by 28% only, from Rs.4.3 lakh crore to Rs.5.5 lakh crore. Between 2014—15 and 2021—22, the share of corporate tax in the total collection fell from 34.5% to 24.7%. If corporate tax collections fell by 16% in 2019—20, that reduction was mainly due to slowdown. Over and above that again when there was an 18% fall in corporate tax collection that was due both to dip in production and profits as well as tax-cuts.
We are not going into the moral-political implications here of such a huge bonanza to the corporate sector at a time of acute pandemic crisis when millions lost jobs and incomes eroded and people endured extreme suffering. Rather, it needs to be underlined that the main rationale for such a bonanza to the corporate sector was cited as a stimulus to facilitate high growth. But such high growth continues to remain a mirage and the growth rate is going south. Why?
Tax cuts and other such concessions need not necessarily push up growth. Rather, the corporate honchos would increase the dividends for themselves and divert the money into other speculative avenues like stock and securities markets or real estate and currency speculation or even plain IPL speculation. Going by the investment and growth outcome, this is precisely what happened with Indian businesspersons.
Diversion of capital into speculative activities
The pandemic saw a surge in stock and securities markets and even the real estate speculation revived. India’s total market capitalization in equity markets stood at $1.3 trillion (Rs.1 lakh crore), went up to $2.5 trillion (Rs.1.94 lakh crore) and as on March 2022, the figure had jumped to $3.2 trillion (Rs.2.48 lakh crore).
In the first pandemic year 2020–21, Indian corporate firms raised an all-time high record amount of Rs.1,88,900 crore from the public equity markets. This was more than double the amount of Rs.91,670 crore raised the previous year.
As per the Economic Outlook of CMIE dated 24 January 2022, Indian stock markets witnessed 14.3 million new investors in the first pandemic year of 2020—21 and this was followed by another 15.1 million new investors in the first half of 2021—22. This was in the backdrop of 5 to 6 million additions per year between 2017—18 to 2019—20 and before that an average addition of only 1—2 million per year. From about 36 million retail investors in March 2019, India had about 70 million retail investors in September 2021.
This showed that the pandemic brought about a quantum leap in the number of retail investors, which in theoretical terms reflects greater centralization of capital. However, in March 2019, retail investors owned only 8.8% of the equity in listed companies. By September 2021, despite the number of retail investors doubling, their ownership of equities in listed companies increased by just 0.67% taking their total share to 9.47%. The stakes of Indian promoters in listed companies, however, increased by a substantial 4.44% from 31.72% to 36.16%. The government’s stake in listed companies fell by 3.11% in this period from 9.08% to 6.86%.
This could only mean that big firms not only raised huge amount of funds through the stock markets during the pandemic, they also invested/parked their funds in the stock markets/mutual funds and earning higher value by appreciation of share prices and by dividends than by investing directly in production, whether in new plants or for expansion of existing capacity.
Concentration in the Corporate World
India’s 20 most profitable companies accounted for nearly 65 per cent of all corporate profits among listed companies in the first half of 2021-22 (FY22), as against a 62.4 per cent share in FY21.
Around 40% of the corporate tax is received from fewer than 100 companies. That is the level of concentration in the corporate world.
So investment and growth in the economy depends mainly on the listed companies; or, even a fraction of them. In the face of slowdown, the government first focused on the corporate sector by giving generous tax-cuts. Only later, when it failed to stimulate fresh investment, they shifted the focus to MSMEs. But the catch was the concession for the corporate sector was in absolute terms but the facility for the MSMEs was only credit expansion with government guarantee. In other words, the government priority thrust in extending the stimulus is skewed and doesn’t favour stimulus to broad-based investment growth in the economy but is pegged on a few hundred corporate majors only. This is a hurdle to higher growth.
Sluggish corporate investment
Despite there being no dearth of funds, if the Indian corporate sector could not borrow and invest its way to quick recovery and high growth, it was because deeper cyclical reasons were at play.
To cite one example, listed Indian companies saw their total income shrink by 3.4 percent even as their net profits soared 176.5 percent during the COVID-19 year 2020-21, as per the CMIE’s Economic Outlook report. This was thanks to the hefty government bonanza in the form tax concessions, which however are not sustainable – as except in the case of tax-cuts the tax-waivers in many cases are limited to 5 years only.
Secondly, there was a mismatch in the Union Budget 2022—23 between the modest revenue targets and the massive capital expenditure targets. If the government sticks to its single-minded thrust on capital expenditure into big-ticket infra projects, there is no alternative to borrowing heavily from the markets. This will crowd out the private corporate borrowers, on the one hand, and let the national fiscal deficit go out of control, on the other hand, triggering a sharp hike in inflation. RBI is also making money costlier for the corporate sector with a hike in rates. No wonder corporate investment is sluggish.
Why are corporate investments not picking up?
Corporate savings in India account for 8% GDP. Savings by non-financial corporations were Rs.18,98,878 crore and savings of private financial corporations were Rs.2,70,776 crore in 2019—20. But private capital investment was at around Rs.2.2 lakh crore in March 2019 for the previous fiscal it went up to Rs.5.7 lakh crore by December 2019 during FY20.
Ideally, corporate investment should be much higher than corporate savings and the extra money would be raised through borrowings or FDI. But during the pandemic it has been the other way around. Where is the remaining money going?
Only the answer to this question can partly clarify why corporate investments are also not up to the mark. Just as the Indian corporate sector failed to cope with the pandemic crisis, it appears to be failing in coming out of the crisis in the post-pandemic period as well.
B Sivaraman is a researcher based in Allahabad, Uttar Pradesh
 A note of caution here might be in order here. Some unscrupulous banks like Axis Bank opened one demat account (for online trading in stock markets) compulsorily for every person who opened a savings account even without taking the consent of the concerned person and these demat account holders are also perhaps counted among “retail investors”. Many of them would have limited themselves to just one or two transactions buying a few shares before going dormant. Anyway, despite this aberration, Indian stock markets show a high level of concentration of capital by big corporate firms.
 Source: https://www.business-standard.com/article/companies/profit-concentration-in-india-inc-rises-amid-private-sector-growth-121112500070_1.html
 Table 11, page.37, RBI Handbook of Statistics on the Indian Economy 2020—21.