EAC-PM recommends targeted support measures for innovative firms

The Economic Advisory Council to the Prime Minister (EAC-PM), in its working paper ‘An Investigation Into Corporate Profits and Investment’, has recommended the intensification of targeted support measures for innovative firms to speed up investment decisions, alongside increased public investment to encourage private investment. It said the data shows that corporate investment was increasing till FY20 before falling sharply during the pandemic. it said ‘Existing policy support measures need to be intensified. These include production-linked incentive schemes and public investment aimed at crowding in private investment.’

It noted that the global economy has shown a rise in corporate profits and profitability, accompanied by subdued investment sentiment since the global financial crisis, with the problem worsening after the pandemic. It also recommended 'intensification of targeted support measures for innovative firms' and increased industry-academia linkage, as well as policy measures to increase the efficiency of contract enforcement and commercial dispute redressal.

It pointed out that post-pandemic, recovery of aggregate profits before interest and taxes (PBIT) and firm-level profitability has been sustained, with a growth rate of 21.4 per cent in FY24. Corporate investment has also recovered, but the recovery has been slower and less sustained. The growth of gross fixed assets (GFA) was 6.1 per cent in FY24. The slower recovery was particularly relevant for foreign-owned firms and Indian private firms.

According to it, cross-sectional analysis shows that the high investment levels recorded in FY20 were driven by a spike in high investment intensity among certain large asset-rich companies. It said ‘Such a high intensity spike disappeared during the pandemic and was not observed in the post-pandemic recovery period, partly explaining the decline and slower recovery of investment levels.’ It added that there is also evidence of downward pressure on firm-level investment driven by a decline in marginal profitability.