Record corporate profits, dividend payouts point out to their unwillingness to help boost economy’s strengths
Even as the industries and businesses (large corporations, domestic and foreign-owned included) expect the government to formulate policies and take fiscal measures to stimulate aggregate demand to put the Indian economy on an ‘accelerated and sustained’ growth trajectory, it’s worth asking what exactly they themselves are doing in pursuit of this overarching goal?
An analysis of the financials of India’s largest companies—those comprising the BSE 500 index (the index covers every sector; besides it includes public sector undertakings (PSUs), as well as overseas subsidiaries of Indian-owned private-sector businesses, hence captures a broad trend)—shows focus on revenue, profits and dividend payouts, which represent a slice of the profits distributed to the shareholders, over the past five financial years (FY).
The profits of corporations included in this index went up from `480,000 crore during FY 2017-18 to more than `1,000,000 crore during FY 2021-22. This is an increase of over 100 per cent whereas their revenues growth was only 47 per cent during this period. It means that payments to factors of production other than the owners of capital (read: shareholders) such as to employees/workers, purchase of inputs, interest payments, etc., have been kept under tight leash, resulting in a disproportionate boost to profits.
Aggregate dividends paid by these firms increased from `176,000 crore during FY 2017-18 to `302,000 crore during FY 2021-22—an increase of 72 per cent. In each of the last five years, they paid at least 30 per cent of aggregate net profit as dividend (the policy of keeping dividends tax-free in the hands of recipients also prompted them to follow this practice brazenly). Cumulatively, they distributed 34 per cent of profit as dividend. This is an unusually high payout ratio—even higher than 30 per cent paid by the world’s largest companies included in America’s S&P 500.
Thus, the companies have done little to re-invest the profits for growth. On the other hand, the government being the owner of PSUs has been using profit making undertakings to hand out large dividends to achieve its fiscal deficit target. It has done so despite the compelling need to invest to meet growth targets in their respective sectors (for instance, Oil and Natural Gas Corporation or ONGC must invest to increase domestic production of oil and gas).
Whether profits (albeit extraordinary) to the company or high dividend to shareholders, it has been paid for or come at the cost of millions of others. For instance, `1,000,000 crore profits of firms in the BSE 500 index during FY 2021-22 came at the cost of undermining the purchasing power of millions of consumers. If even 50 per cent of this amount or `500,000 crore had remained with the latter, imagine, the boost this would have given to the aggregate demand.
Likewise, look at the `302,000 crore dividend paid to shareholders during FY 2021-22—an overwhelming share of this going to the promoters and other minority shareholders. If, instead of filling their coffers—the money that merely adds to their cash balances or spent on a few discretionary/luxury items—more of it were to be distributed as higher salary to employees/workers particularly at the lower rung, imagine what it would do to demand.
The above trends are manifestations of a tendency in every business whereby the benefits of growth are appropriated mostly by a few persons at the top even as the majority of those at the bottom of pyramid get very little. Indeed, this is something intrinsic to the way businesses are planned and orchestrated.
It all starts with the government offering a policy environment in which investors are offered an opportunity to earn an attractive rate of return on investment. What should be that attractive rate, this is not normally defined (though in certain sectors like power, fertilizers, it guarantees a minimum return); so any level however high can fall within the scope of ‘attractiveness’.
A number of big businesses enjoy pricing power. For instance, those operating in metals such as copper, zinc, aluminum or in hydrocarbons like oil and gas enjoy natural monopoly. Leveraging this, they charge high prices making windfall gains. The private banks too enjoy pricing power in regard to the loan extended by them enabling margins of 3-4 per cent and in turn, mammoth profits. Then, there are companies in the IT and IT-enabled sector which use their intellectual prowess to post huge profits year-after-year.
Enterprises in the chemical, petrochemicals, pharmaceutical and agrochemicals sectors have hugely benefited from a protective policy environment with high tariff on imports as well as licensing and registration requirements. They make money at the expense of millions of consumers, including farmers.
The owners/promoters of these businesses also leave no stone unturned in ensuring that their tax liability is kept at bare minimum. The government is also more than willing to help them in their zeal to maximize profits. Look at the steep reduction in corporate tax rate to 15 per cent for new enterprises and to 22 per cent for existing entities given in September 2019. The decision resulted in annual loss of close to `150,000 crore to the exchequer and corresponding bonanza to businesses yet yielded little in terms of spurring investment.
Most of these being capital-intensive and skill-intensive industries, the employees benefiting from profit sharing are miniscule in the country’s workforce of over 500 million. On the other hand, labour intensive sectors such as textiles, apparels, footwear, food service, and hospitality provide jobs, including to un-skilled workers on a large scale.
Over 60 million small and medium enterprises (SMEs) are privately owned businesses also ape large enterprises when it comes to distributing the proceeds of wealth generation. Their owners spend the least on payment to workers, thereby boosting their earnings.
The other important job provider is agriculture. Here, mostly farmers are the owner as well as cultivator/worker. Tens of millions of them are at the mercy of a handful of traders. The latter buy crops from the former at throwaway price (MSP notified by GOI remains mostly on paper) and sell to the consumer at high price.
Briefly put, irrespective of the nature of business, big or small, or sector affiliation like agriculture, industry, services or trade, all are structured to result in concentration of income in the hands of their owners or highly paid professionals at the top of the pyramid. Even the benefit of tax concessions end up filling pockets of the top few.
Having filled their own coffers to mountain level (according to the Oxfam report, “Inequality Kills’’, collective wealth of India’s 100 richest people in 2021 hit a record high of $775 billion or over 25 per cent of India’s GDP), for the businesses to expect that the vast majority left impoverished by former’s actions would provide the much needed demand push or expect the government to fill the gap is an abhorrent idea. Surely, they can’t have the cake and eat it too.
(The author is a policy analyst)
https://www.dailypioneer.com/2022/columnists/businesses-can—t-have-the-cake-and-eat-it-too.html
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