Irrespective of their size or industry sector, all businesses are structured to result in concentration of income in the hands of their owners
Even as industries and businesses — both domestic and foreign-owned large corporations — 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. A key question that needs serious introspection is: What are they doing in pursuit of this overarching goal?
An analysis of the financials of India’s largest companies — those comprising the BSE 500 index — with focus on revenue, profits and dividend payouts, over the past five financial years (FY) gives us some clues.
The profits of corporations included in this index went up from Rs 480,000 crore during FY 2017-18 to more than Rs 1000,000 crore during FY 2021-22 – an increase of over 100%, whereas their revenue growth was only 47% during this period. This 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 a tight leash, resulting in disproportionate boost to profits.
Aggregate dividend paid by these firms increased from Rs 176,000 crore during FY 2017-18 to Rs 302,000 crore during FY 2021-22, which is an increase of 72%. In each of the last five years, they paid at least 30% of aggregate net profit as dividend. Cumulatively, the companies distributed 34% of profits as dividend. This is an unusually high payout ratio – even higher than 30% 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.
Whether profits, albeit extraordinary, to the company or high dividend to shareholders, they have been paid for or come at the cost of others. For instance, Rs 1000,000 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% of this amount or Rs 500,000 crore had remained with the latter, aggregate demand would have gone up manifolds.
Likewise, look at the Rs 302,000 crore dividend paid to shareholders during FY 2021-22. An overwhelming share of this went 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 distributed in higher salaries to their employees 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 people at the top even as the majority of those at the bottom of the pyramid get very little. Indeed, this is something intrinsic to the way businesses are planned and orchestrated.
A number of big businesses enjoy pricing power. For instance, those operating in metals such as copper, zinc, aluminium or in hydrocarbons like oil and gas, enjoy a natural monopoly. Leveraging this, they charge high prices, resulting in windfall gains for themselves. Then, there are companies in the IT and IT-enabled sector that 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 a 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 ensure that their tax liability is kept at bare minimum. The government seems more than willing to help them in their zeal to maximise profits. Look at the steep reduction in corporate tax rate to 15% for new enterprises and to 22% for existing entities in September 2019. The decision resulted in an annual loss of close to Rs 150,000 crore to the exchequer; and the corresponding bonanza to businesses failed to spur investment.
Over 60 million small and medium enterprises (SMEs) also ape large enterprises when it comes to distributing the wealth generated. Their owners spend the least on payment to workers.
In short, irrespective of their size or industry sector, all businesses 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 tax benefits are enjoyed by the top few. The working class, especially in the SMEs as also millions of farmers and landless farm workers, are at the receiving end.
According to an Oxfam report, ‘Inequality Kills’, the collective wealth of India’s 100 richest people in 2021 hit a record high of US$775 billion or over 25% of India’s GDP. This being the reality, businesses cannot expect the impoverished, or the government, to give the much needed demand push and fill the gap. It is an an abhorrent idea.
(The writer is a policy analyst)
https://www.deccanherald.com/opinion/in-perspective/eschew-greed-boost-demand-1149180.html