The corporate profit-to-GDP ratio has the potential to reach around 5 per cent, provided it is supported by policies that promote corporate activities.

Diversified financial services firm Motilal Oswal estimates that the ratio had peaked to 7.8 per cent in 2008 and since then has broadly been on a downward trajectory, reaching 3 per cent in 2018.

“Corporate profit to GDP is a number which is tracked around the world. We do our estimates every quarter. That has come down to less than 2 per cent now,” said Raamdeo Agrawal, co-founder, joint managing director, Motilal Oswal Financial Services.

Speaking at a session organised by the CFA Society India on Saturday, Agrawal said the tax revenue essential for government activities would increase if the corporate profit is at a high level.

“The government wants water, houses, roads, hygiene for everybody. But tax revenue has to come. This will come only if corporate activities, employment and corporate profit are at a high level. It will happen. Politicians know that they can ignore till they can ignore. But the right thing has to be done in the end. I am sure the right policies will come, maybe it will come on the 5th (July) itself (on day of budget),” Agrawal said.

“I am optimistic that corporate profit will turn around, if not now then in the coming months. There is a good likelihood that corporate profit-to-GDP will reach 5 per cent. If our GDP doubles, our profit will also double,” he said.

The government has set a target to make India a $5-trillion economy by 2024.

The corporate profit-to-GDP ratio had doubled from 2.8 per cent to 5.5 per cent during 2003-08, with Nifty 500 profits growing at a substantial 31 per cent, twice the pace of the underlying GDP growth (CAGR of 14.5 per cent).

According to Motilal Oswal, the surge was driven by exports, investment and capex-oriented sectors. “We note that in every cycle, new sectors evolve and contribute to the profit-to-GDP metrics. This is a reflection of the change in the underlying economy. In the earlier upcycle of 2003-08, sectors such as infrastructure, cement, capital goods and construction evolved even as investments— as a proportion of GDP – galloped,” the report said.