Analyzing the decreased contribution of India’s biggest companies to economic growth

In FY23, India’s leading firms contributed less to economic growth, as corporate profit to GDP ratio hit 4.1%.

India’s largest companies have experienced a decline in their contribution to the overall macroeconomic growth in the fiscal year ending in March. A comprehensive data analysis reveals that the corporate profit to gross domestic product (GDP) ratio of Nifty 500 companies has slightly dropped to 4.1 percent in FY23, primarily influenced by the fluctuations in commodities prices. Nonetheless, the profitability of companies in the banking, financial services, and insurance (BFSI) sectors has shown an upward trend, offered some relief and contributed to a partial offset.

In the previous fiscal year, the corporate profit as a percentage of GDP, an important metric used to assess the impact of listed companies on the overall economic output, reached its highest level in a decade, standing at 4.3 percent in FY22. The Nifty 500 companies, encompassing over 90 percent of the market capitalization of all listed firms, provide a comprehensive snapshot of the performance of larger companies within the listed domain.

The combined corporate profit of Nifty 500 companies exhibited a decelerated growth rate of 8.7 percent year-on-year (YoY) in FY23. This stands in stark contrast to the remarkable surges of 49 percent YoY in FY22 and 50 percent YoY in FY21.

According to an analysis conducted by Motilal Oswal Financial Services, drawing data from Capitaline and the Reserve Bank of India, the corporate profit to GDP ratio for listed companies experienced a decline to 4.3 percent in FY23. This followed a notable milestone of reaching a ten-year high of 4.5 percent in the preceding fiscal year.

With the exception of 2017, the contribution of listed companies to economic output has shown a consistent decline since 2010. The year 2017 witnessed a revival in the profitability of global cyclical industries like metals and oil & gas, along with a reduction in losses for public sector undertaking (PSU) banks. These factors enabled companies to expand their operations and achieve improved levels of profitability.

Commodity prices hurt profitability

From FY20 to FY23, the compound annual growth rate (CAGR) of revenue for Nifty 500 companies stood at 14.8 percent, largely driven by global commodities and automobiles. However, the revenue CAGR over the period of 2018-2023 was more moderate at 12.5 percent, influenced by various factors including the correction in commodity prices and a slowdown in revenue growth within consumer-oriented sectors.

In FY23, the Nifty 500 companies experienced a contraction of 310 basis points (bps) in operating margins and 220 basis points (bps) in profit margins compared to the previous year. This decline can be attributed to the significant increase in commodity prices, which was a consequence of global macroeconomic challenges. Sectors closely linked to global commodities faced the most significant impact, as the substantial price volatility had a cascading effect on the margins of corporate entities in India.

Data shows that in FY23, the combined net profit of commodity companies experienced a significant decline of Rs1.3 trillion, reaching Rs2.5 trillion. As a result, the aggregate net profit to GDP ratio decreased to 4.3 percent. The situation was further aggravated by a surge in nominal GDP (15.9 percent YoY) due to high inflation in FY23, which intensified the impact of the contraction in the profit pool of commodities. Consequently, the ratio of profit after tax (PAT) to GDP declined from 4.5 percent in FY22 to 4.3 percent in FY23.