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Business News/ Market / Mark-to-market/  Is claim of stronger GDP growth backed by corporate results?
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Is claim of stronger GDP growth backed by corporate results?

Whether the gap in the old and new GDP data series can be mainly attributed to better profitability and productivity is a question

Graphic: Naveen Kumar Saini/MintPremium
Graphic: Naveen Kumar Saini/Mint

The government’s data crunchers bowled a googly that stumped most who tried to make sense of it, as revised gross domestic product (GDP) calculations pegged growth in 2013-14 at 6.9% compared with 5.4% in the old series. In 2014-15, growth is estimated at 7.4%. Nobody believes this data as activity on the ground does not support the numbers.

Much furore has ensued since then, but the data stays in place, and one explanation put forward by the government for the variation is that value-addition by the Indian companies is being captured more effectively now. The new series incorporates corporate financial reporting in its calculations.

Let’s see if that’s indeed the case, using companies in the S&P BSE 500 index, excluding banks as a proxy, based on stand-alone financial statements for the six months ended September. In the first half of 2014-15, revenue growth was relatively low at 6.4% and though higher, even the prior period’s 8.3% revenue growth is uninspiring.

Both years have seen profitability improve, with the 2014-15 first half’s operating profit margin rising by 76 basis points (bps) and by 80 basis points in the first half of 2013-14. A basis point is one-hundredth of a percentage point.

That means expenditure growth has trended below sales growth in both years. While companies may have had little control over rising raw material costs, especially in 2013-14, they appear to have either cut costs in other areas or become efficient. New capacities may have also given them scale advantages.

What about asset utilization? If we look at return on assets—calculated by dividing net profit by total assets—then there is an improvement in both years. In the first half of 2014-15, the ratio improved by 1.2 percentage points, while it was a more sedate 33 basis points in the previous year. That is a creditable improvement.

While higher profit growth is one reason, companies have also flogged their assets well. In the first half of 2014-15, fixed assets saw low growth (since capital investments slowed down), while net current assets (working capital) declined. In the first six months of 2013-14, fixed asset growth was decent at 15.8%, but again net current assets grew at a slow rate of 4%. Better working capital management has come to their help.

Whether the gap in the old and new GDP data series can be mainly attributed to better profitability and productivity is a question, but that these variables have improved is not.

Note that this analysis pertains to stand-alone financials since that is relevant to India’s GDP, and does not consider consolidated numbers, which may include performance of overseas subsidiaries. That could have a significant impact on reported results in sectors such as pharmaceuticals, technology, automobiles and metals.

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Published: 23 Feb 2015, 07:29 PM IST
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