Abstract
This chapter analyzes corporate responses to public policy changes. Using data from National Accounts Statistics and Reserve Bank of India’s Studies of Company Finances, it shows that the response of the private corporate sector to the public policy changes has been in line with the expected outcomes of increasing the sector’s contribution to the growth process. Not only that the sector’s share of capital formation and savings in country’s NDP increased, but the sector aided their growth as well. However, the way corporate sector responded brought about a shift in the composition of corporate income with profit share rising considerably. This was largely attributable to the sector’s increased reliance on shareholders’ fund. With reductions in direct corporate tax rate, the incidence of corporation tax showed an upward trend. Although the sector’s engagement with the rest of the world was facilitated by trade and foreign investment related policies, the sector continued to have lower earnings than their expenditure in foreign currencies. The chapter also reports that market valuation remained higher relative to the replacement cost (that is, Tobin’s Q exceeding unity), implying that corporate investment decisions were driven by market sentiments. This changing character of the private corporate sector has implications for income distribution as well as for achieving stability in growth.
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Notes
- 1.
RBI classifies a company under FDI companies’ category in which “10 percent or more equity holding by foreign investor/s”. This is same as the definition followed in Balance of Payments. See RBI Monthly Bulletin, December 2012, p. 2389. This series has begun from the year 1992–93 which gives data for previous two years. As there was no separate study available for 1995–96, data for this year were taken from 1996–97 studies.
- 2.
That is, percentage of PUC of sample FDI companies to PUC of FDI companies as per the RBI’s Census of Foreign Assets and Liabilities.
- 3.
Securities and Exchange Board of India (SEBI) was established on April 12, 1988 with the objective to promote an orderly and healthy development of the securities markets and to provide adequate investor protection.
- 4.
After examining structure of sources of funds of NGNF PLC, using RBI data, Rajakumar (2014b) noticed that depreciation provision and trade credit were other major sources of funds. While depreciation related to fiscal measures, trade credit to credit practices. Considering the present context, the analysis is confined to borrowings and equity, which directly reflect corporate’s response to developments in the financial sector.
- 5.
The debt here includes both long term and short term borrowings from banks and other financial institutions and also by issue of securities such as debentures.
- 6.
Rajakumar (2014d) noticed that profit margin tended to contract when manufacturing cost rose due to higher inflation and so argued that the inability of companies to pass on burden of rising cost to customers was an indication of weak market power of companies in general.
- 7.
They include financial and government companies as well. P/E ratio is as of financial year end, collected from the website of National Stock Exchange (NSE) (www.nseindia.com).
- 8.
- 9.
This is based on data extracted from EPWRF India Time Series.
- 10.
For estimating capital formation, CSO considers only reproducible tangible assets such as buildings, machinery and equipment and it excludes non-reproducible tangibles assets such as land (CSO, 2012). In the balance sheets, companies report land as part of their fixed assets and we have retained it as part of NFA, as it is very much part of firms replacement cost.
- 11.
Following a similar approach and using RBI’s studies of NGNF PLC for the period 2005–06 to 2012–13, Rajakumar (2014d) estimated Tobin’s Q for these companies and found the correlation coefficient between Tobin’s Q and growth rate of gross capital formation of PCS to be 0.890 and between Tobin’s Q and growth rate of GFCF of PCS to be 0.879.
- 12.
Under Income Tax Act, any company incorporated in India is a domestic company, whether it has a foreign holding or not. A unit set up by a foreign company in India can well be a subsidiary which is incorporated in India, in which case it would be considered a domestic company.
The STRs have been collected from Finance Bill, accompanying Union Budget of Government of India, of the relevant financial years. The STR refers to mandatory Corporate Tax Rate. Additionally, it includes Surcharge, Education Cess, and Secondary and Higher Education Cess, as they were stipulated from time to time.
- 13.
Although companies in India faced high direct tax rates, they were given several tax reliefs and concessions, mostly linked to investment, such as depreciation allowance, investment allowance, tax holidays, loss carry forward, etc., so as to facilitate generation of funds internally. For further details, see Rajakumar (2009).
- 14.
Remittances of technical fees and royalties are mostly for technical collaborations. Technical fees are lump sum payments, whereas royalties are recurring payments made for using unpatented know-how and services. Dividends are remitted for foreign equity participation. RBI discontinued publishing these information from 1993–94 in the case of public and private limited companies, and 2008–09 for FDI companies. It however clubs all such non-imports spending under an item ‘Other Expenditure in Foreign Currencies’. In RBI’s studies, imports are valued at cost, insurance and freight (cif), whereas exports in terms of freight on board (fob), which are consistent with the valuation of imports and exports in the country’s balance of payments.
- 15.
In the literature, the following measures of import intensity have been used: Raw materials and components imported as percentage of Total raw material and components consumed; Stores and spares imported as percentage of Total stores and spares consumed; Raw material, components, stores and spares imported as percentage of Sales; Capital goods imported as percentage of Spending on purchases of capital goods; and Non-import spending as percentage of Sales. Invariably, the import intensity shows a rising trend. For further details, see Mani (1991), Sathe (1997) and Rajakumar (2014).
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Rajakumar, J.D. (2023). Corporate Response to Public Policy Changes: Some Intriguing Aspects. In: Chakraborty, A., Chakraborty, I. (eds) Indian Business Groups and Other Corporations. India Studies in Business and Economics. Springer, Singapore. https://doi.org/10.1007/978-981-99-5041-6_3
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