Median Indian firm grew in size after Covid-19 pandemic, EAC-PM paper finds | Economy & Policy News

The size of the median Indian firm increased across key financial measures after the Covid-19 pandemic, with capital employed, revenue, profit and assets rising steadily between FY2020-21 and FY2023-24, according to a working paper by the Economic Advisory Council to the Prime Minister (EAC-PM).

A median firm refers to the company that sits in the middle of the firms studied, meaning half the firms are smaller and half are larger based on a particular measure such as revenue, assets or capital employed.

The paper, titled An investigation into corporate profits and investment, analysed firm-level data from the Centre for Monitoring Indian Economy’s (CMIE’s) Prowess database. It examined corporate profits and investment trends from FY2008-09 to FY2023-24, with some data available for FY2024-25.

The study, which included 9,577 companies in total, found that the increase in the size of median firms was visible across capital employed, profit before interest and tax (PBIT), total revenue, employee costs, average total assets and changes in gross fixed assets (GFA). The rise was also accompanied by an improvement in firm-level return on average assets (ROA).

Median firms expands across key financial measures

The study found that median capital employed increased from ₹1,674.9 million in FY2020-21 to ₹1,994.2 million in FY2023-24. Median revenue rose from ₹1,943 million to ₹2,736.5 million during the same period.

Median PBIT also increased from ₹145.3 million in FY2020-21 to ₹232 million in FY2023-24. Median employee costs rose from ₹160.9 million to ₹209.5 million, while average total assets increased from ₹2,478.6 million to ₹2,811.4 million.  

The paper noted that the size of median firms had increased after FY2020-21 across most parameters.

Recovery in corporate profitability

The increase in firm size came alongside a sharp recovery in corporate profitability. Aggregate PBIT grew 21.4 per cent year-on-year in FY2023-24, while total assets grew around 7.2 per cent.

Median ROA, another measure of corporate profitability, increased from around 4.4 per cent in FY2020-21 to 7.2 per cent in FY2023-24. The paper said it rose further to 7.7 per cent in FY2024-25, although the latest-year Prowess data was not complete.

Investment recovery trails profit growth

Despite the improvement in profitability and firm size, corporate investment has recovered more slowly.

PBIT grew 21.42 per cent in FY2023-24, while GFA increased only 6.10 per cent. This created a 15.32 percentage point gap between the growth in corporate profitability and physical capital formation.

GFA growth had fallen to -1.06 per cent in FY2020-21 during the pandemic. It recovered to 2.22 per cent in FY2021-22, 6.81 per cent in FY2022-23 and 6.10 per cent in FY2023-24.

Corporate investment follows a cycle

The EAC-PM paper found a cyclical pattern in corporate investment, with major investment peaks in FY2008-09, FY2014-15 and FY2019-20. These peaks were followed by periods of weaker investment and gradual recovery.

The paper said larger and more asset-rich companies have higher investment intensity and play a major role in driving overall investment. One possible explanation for the cycle is the time lag between the creation of new capacity and its utilisation. Companies may invest ahead of expected demand and then wait for existing capacity to be used before starting another investment cycle, the paper stated.

Indian business groups lead investment recovery

The recovery has also varied by ownership. Investment intensity amon Indian business groups fell during the first year of the pandemic but has gradually recovered since then.

Indian private companies saw a partial recovery in FY2021-22, but their investment intensity has remained largely unchanged since. Foreign-owned companies have been the exception, recording a continuous decline in investment intensity after the FY2019-20 peak.

Manufacturing firms had higher investment intensity than other companies until FY2014-15. At the FY2019-20 investment peak, manufacturing and non-financial services firms contributed almost equally to the investment-to-GDP ratio. After the pandemic, manufacturing investment intensity recovered to levels seen in FY2018-19.