Corporate profits

Industrial growth declines even as corporate profits hit all-time highs

Amid the pandemic gloom and weak economic recovery, corporate profits have skyrocketed to all-time highs, as have the stock markets. In FY21, net profit of listed companies (over 4,000) hit an all-time high, rising 57.6% to 5.31 lakh crore, and its share in GDP peaked in 10 years of 2.63%.

Commenting on the performance of the top 500 listed companies it tracks, Fortune India commented, “This is the first time since 2010 – when Fortune India started chronicling Indian companies in the marquee list – that the growth of year-over-year revenue (YoY) decreased 2.4% in FY21. But, the profit turned out to be the best ever – with a record 75% year-on-year growth to ₹ 6.22 lakh crore, a resounding turnaround from last year when the Fortune 500 universe saw its cumulative profit fell 22% year on year to ₹ 3.6 lakh crore. “

The reasons are known: sharp reduction in corporate tax (1.45 lakh crore in September 2019), cheap credit, better profitability, etc. The less commented aspect is the reduction in jobs and wages.

The trend continues in FY22 and a new all-time high is expected. Fortune India reported that in the first two quarters (S1) of FY22, net profits of listed companies (over 4,000) recorded “over 80% of annual profit” of FY21.

This trend contrasts sharply with the general state of the economy.

In FY21 GDP growth fell to -7.3% – one of the worst in the world – and in FY22 it is expected to be 9.5% but in reality only 1.6% compared to fiscal year 20 (GDP growth of 4%), according to the monthly Ministry of Finance. November 2021 report says. In addition, the average annual GDP growth in the 15 years leading up to FY20 – between FY05 and FY19 – was well over 7%. Corporate profits did not reach such highs at the time.

In addition, during the pandemic, nearly half a million Indians (over 4.5 lakh) lost their lives due to the Covid-19 virus and over 34 million were infected with it – the both resulting in high health costs, which under normal circumstances push 60 million Indians into poverty each year, as the government officially admitted when the Ayushman Bharat (PM-JAY) program launched in 2018.

It is not known how many of them lost jobs and businesses (especially micro and small ones) during the pandemic crisis. Numerous studies have shown that jobs have shifted from the high-yield, high-income organized / formal sector to a low-yield, low-income unorganized / informal sector such as agriculture. The demand for low-paying, menial MGNREGS jobs has skyrocketed due to reverse migration and rural distress.

All of these developments reflect a massive loss of household income and weak consumer demand – which also reduce the prospects for future growth.

There is yet another disconnection.

Industrial production growth hits new lows

The latest data on industrial production growth, as measured by the Industrial Production Index (IIP), paint a grim picture. In October 2021 (festive high-sale season), the overall PII (general) increased (monthly) by 3.2%, the manufacturing PII by 2% and electricity by 3.1%. The only one that saw robust growth was mining (11.4%).

The long-term annual growth of PII (both overall and manufacturing reflect the trend) also presents a grim picture. The average annual growth of IIP was less than 5% in the 2011-12 IIP series, sliding to -0.8% in fiscal year 20 (before the pandemic) and to -8.4% during for fiscal year 21. The average annual growth of PII during fiscal years 2013-FY21 is 1.9%. This is well below the annual average of 8% in FY2006-FY2012 under Series IIP 2004-05.

Likewise, the monthly output growth of two categories that indicate prospects for future growth and the soundness of household finances – capital goods and durable consumer goods – fell in October 2021. Capital goods saw growth decline to -1.1% and durable consumer goods to -6.1%. Their annual growth rates are not encouraging either. Capital goods increased by -13.9% and durable consumer goods by -8.7% in the pre-pandemic year of FY20.

The lower growth of the IIP reflects the decline in demand in the economy for the production of goods. The low growth rate in FY20 is a reflection of the pre-pandemic slowdown.

Capacity utilization in manufacturing at its lowest for several years

Capacity utilization (UC) in the manufacturing sector is another indicator of the health of the industry, as it measures the actual output of manufactured goods relative to installed capacity. Low CU means low demand for manufactured goods in the economy, as does low PII growth.

The latest data shows that capacity utilization in the first quarter of FY22 fell to 60% from 73% in the corresponding first quarter of FY20. Long-term trends show a prolonged slowdown. In fact, UC fell well below the 80% or more recorded in FY10-FY11.

Growth in backlogs and inventory-to-sales ratio is improving, but this is more a reflection of pent-up demand following the pandemic disruptions.

Why the disconnection?

It is not difficult to see why there is a lag between soaring corporate profits (both in manufacturing and services) and declining industrial production and capacity utilization.

One obvious answer is that bank and non-bank finance companies (except oil and gas and IT services) form a large part of for-profit corporations. Fortune India’s analysis of the top 500 companies in FY21 showed banks topped the list with over 20% (₹ 1.27 lakh crore) of profits.

Banks do not themselves produce goods and services in an economy to propel growth; they facilitate it, but we do not know to what extent. What we do know is that during FY21, the growth of bank loans (year-on-year) to industry fell to -0.3% and to large industry it fell further. at -1.7%. For services it increased by 2% and for agriculture by 9.8% – both sectors have a strong presence of low productivity and low income informal labor.

The situation was not very different in FY20 either: growth in credit to industry was 0.7%, to large industry 0.6%, to services 7.4% and to agriculture by 4.2%.

Credit growth to the personal loan segment alone has experienced double-digit growth every year since fiscal 2015, when overall credit to the non-food sector fell to single digits. Services only experienced double-digit growth in three of those seven years, in fiscal years 17, 18 and 19.

The disconnect between the financial sector, like banks and nonbank financial institutions, and the real economy is not exactly unknown, but it is for another time.


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