Financial investments by non-financial firms

Is this the future, or will market volatility reverse the trend?

- R KAVITA RAO

The aggregate corporate data, as reflected in the income tax returns, captures a systematic shift in the composition of income of this segment of the economy - away from business income and in favour of passive incomes, i.e., capital gains and other incomes.

To understand this trend a little more, this column uses data from the BSE 500 companies to explore any observable trends. While these companies do not represent the average enterprise in the country, they account for a large share of the value added in corporate India and, therefore, are likely to drive these trends.

There are two ways of looking at this problem - first, has the composition of reported income changed? And second, has the composition of assets changed? In this piece, one looks at the composition of assets to understand the underlying trends by using data from the PROWESS database of the Centre for Monitoring Indian Economy.

Since the nature of business activity differs between financial and non-financial firms, these are presented as two separate categories of companies. The table provides information on the share of physical investments to total investments. Physical investments are defined as net fixed assets, plus capital work in progress and intangibles, while financial investments are defined as long-term investments and long-term loans and advances.

Of the 500 companies, 408 are non-financial companies, while the rest belong to the financial sector. Given the question of interest here, the focus is on non-financial companies. These account for 94-95 per cent of the net fixed assets for BSE 500 companies.