India Inc saw 568.5% jump in profit but still fired employees: CMIE

Listed companies made highest-ever profits in the midst of a severe lockdown by cutting costs a lot more sharply than they suffered fall in sales, private think tank Centre for Monitoring Indian Economy (CMIE) in its latest article has said. It says that though these companies made a killing during the lockdown, they still resorted to significant layoffs and wage cuts.

The CMIE article, after analysing the data of 4,234 listed companies that provided financial statements for the quarter ended September, said the cost-cutting was essentially in raw material and other operating costs.

While the companies' income declined 6.9 per cent, costs on raw materials and purchase of finished goods -- the biggest expense head -- declined by a much bigger margin at 18.9 per cent. In view of Covid curbs, expenses on salaries grew 3.4 per cent but other expenses fell 9 per cent, it says.

During this period, the companies' net profit jumped 568.5 per cent. "Year-on-year growth in profits is volatile. In the recent past it has varied from -98 per cent in the March 2018 quarter to 356 per cent in the March 2019 quarter and down again to -90 per cent in the September 2019 quarter. Even by these standards, a 569 per cent increase in profits is extraordinary," the think tank said.

Since wages account for a relatively small proportion -- 7-10 per cent -- of the total expenses of corporates, the small 3.4 per cent increase in the wage bill in Q2 did not hurt their profits. "What is worth noting and is somewhat intriguing is that firms considered it fit to cut and substantially contain their wage bill although they were making huge profits in the quarter," the CMIE article says.

Also read: Employment contracts by 2.4% in November: CMIE

A cut in the wage bill means a combination of layoffs and wage rate cuts.

Of the 4,234 companies analysed, 2,150 or 50 per cent, cut wage bill in Q2 to their levels a year ago. Another 463 did not show any increase in the wage bill. Total 339 grew their wage bill by less than 6.92 per cent, which was the inflation rate in Q2.

"Therefore a total of 2,952 companies, or 70 per cent of all listed companies recorded a fall in wages in real, inflation-adjusted terms," the article suggests.

While on the whole, companies made a lot of profit during the second quarter, hotels and tourism companies, auto makers, transport companies, those into real estate and mining suffered deep losses. "Given that most of these are also labour-intensive, wage cuts in these industries perhaps, was necessary for survival," says the think tank.

The CMIE article says the wage cut by companies whose operations were not shut by the lockdown, therefore, was more likely "opportunistic than out of business compulsions to survive the lockdown".

Employment in India contracted for the second consecutive month in November, raising questions on the recent optimism around recovery in job markets in the aftermath of COVID-19 pandemic. In November, employment count fell by 0.9 per cent or 3.5 million, as against 0.1 per cent drop recorded in October, according to CMIE data.

The employment in November 2020 was 2.4 per cent lower than it was a year ago.

Also read: Jobs in India projected to fall 2.5% to 395 mn in Q3: CMIE