Corporate growth is in sync with improving economic conditions in the post-Covid era
The Coronavirus has filled negativity in the minds of every class as the year 2020 was a year of crisis for all. However, the situation started improving from the start of 2021. Now workers are returning to their jobs. People are also getting new jobs. Economic activities have increased after the lockdown was opened in a phased manner. As a result, the economy is improving. Estimates of gross domestic product (GDP) have also improved. Not only this, many economists have projected growth in GDP in the last quarter of the current financial year.
Many top Indian IT companies are going to increase the salaries of their employees. Bonuses and perks are also being increased. The financial condition of many large start-up companies has also improved significantly. They are also set to increase the salary of their employees. It is believed that such positive decisions will affect other areas as well. Cognizant, a leading IT company in the country, has created a special fund of USD 30 million so that the salary of employees can be increased to motivate them to work in the company itself. It is worth noting that in the December quarter, the employees' exit rate at Cognizant was 19 per cent. Now Cognizant will use this fund to prevent the performing employees from leaving the job. HCL has announced USD 9 million to give a bonus to its employees. The company has taken such a decision after earning USD 10 billion. Other IT companies such as TCS, Infosys and Wipro have also announced an increase in their employees' salaries.
Due to the Corona pandemic, almost all companies postponed their employees' salary increases in the year 2020. Some companies had also cut staff salaries. At the same time, some employees had also been fired. After the improvement in companies' economic conditions, they are announcing an increase in the salary of employees or giving them bonuses. TCS has announced an increase in salaries of all its employees from October 1. Infosys has increased the salaries of all its employees since January. Wipro has also increased the salaries of 80 per cent of its employees by eight per cent since January. Asian Paints has also announced that it will increase the salaries of its employees in the June quarter. At the same time, some companies, including BharatPe, are offering ESOPs to their employees. An ESOP (employee stock ownership plan) refers to an employee benefit plan which offers employees an ownership interest in the organization. Employee stock ownership plans are issued as direct stocks, profit-sharing plans or bonuses, and the employer has the sole discretion in deciding who could avail these options.
Corporate financial results for the third quarter of the current financial year have been better than the second quarter. Corporate Gross Value Added (GVA) growth of 1,129 companies was 14.7 per cent in the third quarter, compared to 8.6 per cent in the second quarter. GVA is the monetary value of the total final goods and services produced by all sectors in the economy of a country, comprising primary, secondary, and tertiary sectors. In simple words, GVA shows the total performance and income in an economy. The input cost of a product and the amount left after deducting the raw material cost is called GVA. For example, if a company sells a packet of bread for Rs 20 and uses Rs 16 as input and raw material cost to make it, then in that case GVA collection will be considered as Rs 4.
In the Budget, the Government had announced the creation of a bad bank for reducing the pile of existing NPA levels. The concept of a bad bank is not new. Bad banks were established in many countries during the period of the financial crisis from 2007 to 2010. A bad bank was established in Ireland as a National Asset Agency to address the financial crisis of the banks there. Similarly, in 2001, a holding company based in Berlin, named Berliner Bankgesellschaft (BB), went bankrupt, but Berliner Immobilien Holding (BIH), set up in 2006, provided financial services to several other troubled financial institutions including BB for overcoming the crisis.
More than two decades ago, the Malaysian banking system was on the verge of collapse due to the currency crisis. Many other Asian countries were also affected by this crisis. The level of NPA was very high in Malaysian Banks. Within four to five years, it had risen from 2 to 3 per cent to double-digit levels. In Malaysia, the growth rate of the economy was over 9 per cent for almost a decade. Thereafter, the currency crisis started in 1997. Then, the Malaysian government established two Asset Management Companies (AMCs). One was set up for takeovers of bad debt, named "Danaharta" and the other to recapitalize vulnerable banks, called "Danamodal". With the help of these two institutions, banks with high NPAs in Malaysia were rescued from the crisis within seven to eight years. Based on historical data, it is believed that the proposed bad bank will definitely reduce the NPA level of Public Sector Banks (PSBs).
According to the revised estimate, gross tax revenue is estimated at Rs 19 lakh crore or 9.8 per cent of GDP. The gross tax revenue till December 2020 has been Rs 13.38 lakh crore. Based on this, the Government is estimated to collect a revenue of Rs 5.62 lakh crore in the last quarter. The amount collected in the third quarter of the current financial year, which is Rs 6.17 lakh crore, is 36.8 per cent more than the gross tax collected in the second quarter. It may be noted that the gross tax collected in the second quarter was Rs 4.5 lakh crore. If it is assumed that the revenue collection in the last quarter of the current financial year will be the same as the gross tax collection of the previous quarter, then the total revenue collection in FY 2021 will be Rs 21.8 lakh crore, which will be Rs 2.8 lakh crore more than the revised estimate.
If 42 per cent of the revenue of the states' share is included in it, then the fiscal deficit in FY 2021 will be reduced by 0.6 per cent of GDP. In addition, nominal GDP is projected to increase by double digits next year as tax collections are expected to exceed 2021 in the next year. The value of goods and services produced in a year in nominal GDP is calculated at market price. Based on this, speculations are being made that the gross tax collection next year will be more than the Budget estimate of Rs 22.17 lakh crore, which will be 9.9 per cent of GDP.
It can be said that various IT companies are performing well. A few of them are in the process of increasing the salaries of their employees, which is a positive sign for the economy. Due to improving financial conditions at the corporate level, GDP is also improving. GST collection is increasing every month. Even, revenue earned from disinvestment may increase. These signs show that the Indian economy is going in the right direction.
The writer is the Chief Manager in the Department of Economic Research at the Corporate Centre of State Bank of India, Mumbai. Views expressed are personal