PRIVATE corporate sector in India seems to have recorded historically high rates of profits during the post-Covid three years. The average net profit in a quarter suffered a steep decline during the successive quarters ending on March and June 2020 but since the quarter ending September 2020, the net profits of corporate sector recovered by about seven times compared to the pandemic period and touched a record level in the recent period.

In spite of high rates of income growth and increased share of profit within income, investment growth didn’t show adequate response. It is generally assumed that as companies are able to make more profits they would be inclined to invest more in order to earn higher profits in future cycles of operation. Income growth and growth of gross fixed assets peaked at a very high level for the corporate sector in India during the mid-90s and both declined to a low level of growth in the beginning of the 2000s. However, they once again showed a rising trend that continued till the global financial crisis set in 2008-09 and subsequently fell during the pandemic and its immediate aftermath in 2020-21.

We see a sharp recovery both of growth in income and profit after tax as share of total income since 2021-22, but the growth of gross fixed assets continued to be sluggish. It is also important that the central government in its successive budgets has increased its own capital expenditure at a rate of about 30 per cent per annum between 2020-21 to 2023-24 with a view of triggering a virtuous cycle of investment and employment which was expected to be crowding in private corporate investments. On several occasions and particularly with the disappointing results in the 2024 elections for the BJP, they are now officially recognising the fact of real job crisis and consequent deficient aggregate demand which is failing to stimulate private corporate investment.

HIGH PROFIT

GROWTH

In the post liberalisation period, the average annual growth of total income of the corporate sector was similar to the average annual growth of sales which was around 14.35 per cent. However, if we see the average growth of income from financial services in the corporate sector since 1991, it would come around 19.4 per cent annual growth. This primarily indicates that income through financial services grew faster on an average compared to the growth of sales of produced goods. This indicates what drives profit without ‘production’ in contemporary capitalism. Listed companies in India increased their income in the quarter ending March 2024 by 8.1 per cent but their net profit grew by 12.6 per cent. This also shows that profit margin on sales have increased significantly in recent years.

The net profit margin of listed companies in 2023-24 according to CMIE was 10.1 percent. This is the highest profit margin since 2007-08 when it was 10.2 per cent and this was the highest margin in the past 16 years. Therefore, Indian corporate sector gained out of inflation which allowed them to earn higher margins by passing on the burden of rising input costs to the consumers, they benefited by raising their profit margins and at the same time they were able to earn higher profits out of speculative gains.

The profit after tax as per cent of total income was 9.87 in the quarter ending March 2024 and the annual average figure for the past three years was 8.7 per cent.  In other words, corporate sector in India has been earning impressive profit margins in the post-Covid recovery phase. It is also important to note that bank credit growth picked up since 2013-14 but investment growth continued to be lower than the growth of credit provided by the commercial banks of India. Also, Indian corporates in the recent past records a decline in the ratio of mobilisation of external resources to the gross value added of non-agricultural sector.

Investments generally either are funded by internal savings or largely by borrowings from banks. Despite the fact that corporate savings have increased but during the pre-crisis period corporate investment was largely driven by the credit boom which acted as a drag on their current investment decisions. Usually, corporates leverage external funds and use it for new investments to earn higher profits. As a result of which debts grow faster and beyond a threshold access to external resources is restricted as repayments become increasingly difficult. Therefore, corporate debts which ballooned during the pre-crisis period not only increased the burden during the crisis but put a constraint to accessing external resources. On the other hand, corporate savings held in the form of liquid assets do not lead to long term investment.

INVESTMENT GROWTH

SLOWS

The growth of total income, gross and net fixed assets in the Indian corporate sector more or less showed similar trends in the past three decades. It reached its peak in the mid-90s and declined thereafter followed by a phase of upswing till the global financial crisis and then a secular decline for more than one and half decade till the pandemic years. Notably in the recent three years in the post pandemic period, for the entire corporate sector the total income grew by 15.1 per cent while the growth of gross fixed capital formation grew during the same period by only at annual average rate of 7.7 per cent and net fixed capital formation grew only at 4 per cent per annum. Purchase of financial assets by non-financial companies in the corporate sector amounted to Rs 9.9 lakh crores in 2022-23 which appeared to be a turnaround in corporate investment but it was not really so.

According to CMIE figures, the compound annual growth rate of purchase of fixed assets for three-year period, the annual growth rate in the three-year ending 2022-23 was 4.6 per cent which is much lower than the growth of income during that period. Surprisingly we see a sharp rising trend in corporate total income and a consistent rising trend in profit after tax as percentage of income but together with a sharp decline in the growth of gross fixed capital formation in the recent past. True that India’s real GDP growth of 8.2 per cent in 2023-24 was driven by a 9 per cent growth in gross fixed capital formation but this investment growth was largely driven by government’s capital expenditure, while the growth of private final consumption expenditure in 2023-24 declined to 4 per cent down from 6.8 per cent growth recorded in 2022-23.

The growth of corporate profit was supposed to stimulate new investment and an expanded circuit of capital that can to lead to higher profits. But to realise profits there has to be adequate aggregate demand and it seems that corporates are not finding the capex growth enough to stimulate private investment. In an open economy, exports might grow even if domestic demand is not so impressive for so many reasons. But due to sluggish growth in Europe and USA, most of the sectors face a slowdown in external demand. Also, Indian manufacturers lack necessary capacity to enhance their share in the shrinking global demand. In fact, higher competition to grab a larger share in the global market may demand a declining profit on additional unit of sale. On the other hand, rising inequality and suppression of real wages is taking a toll on domestic demand and there is hardly any new investment in many sectors related to consumer goods. This once again shows that capitalists cannot be motivated to invest in order to increase ‘national’ aggregate demand instead such investments are driven by expectations of profits by undertaking production and if that is not so exciting, investors could eye for higher speculative gains by investing in the financial sector. In that case profits would increase and that may jack up the overall growth rate of the economy but may not lead to new employment. The profit-investment gap in turn enhances the disconnect between growth and employment.