Corporate Profits Outpace Investment in Post-Pandemic Recovery: EAC-PM Report
MUMBAI: In the years following the COVID-19 pandemic, India’s corporate sector has witnessed a distinct decoupling between profitability and capital expenditure. According to a recent working paper by the Economic Advisory Council to the Prime Minister (EAC-PM), corporate profits have surged significantly faster than new investments, revealing a nuanced landscape for industrial growth.
The study, which analyzed financial data for 48,896 companies—encompassing both listed and unlisted entities—found that aggregate profit before interest and tax (PBIT) grew by 21.4% in FY24. In stark contrast, gross fixed assets (GFA), a primary proxy for fixed-asset investment, grew by only 6.1% during the same period.
Profitability vs. Capital Expenditure
The data indicates that while corporate India has successfully rebounded from the pandemic, the nature of this recovery is not uniform. The median return on assets (ROA) within the sample rose impressively from 4.4% in FY21 to 7.2% in FY24, suggesting that companies are becoming increasingly efficient at generating earnings from their existing base of operations.
However, this high profitability from existing assets has not translated into a proportional surge in new capital investment. The paper highlights a phenomenon of “weakened marginal profitability,” where firms are hesitant to commit to new, large-scale projects because the anticipated returns on fresh assets appear lower than the returns currently being generated by established infrastructure.
“A company can be earning strongly from its existing plant and machinery but still hold back on adding another plant if it expects the additional investment to deliver lower returns,” the report noted.
Drivers and Constraints
The research suggests that the investment gap is not necessarily a symptom of financial distress or market concentration. Rather, manufacturers appear to be focused on maximizing output from existing facilities, leading to improved capacity utilization.
External factors, however, remain a significant hurdle. Global economic uncertainty, volatile trade conditions, and the rapid pace of technological disruption—which threatens to render new investments obsolete—are likely tempering the enthusiasm of corporate leaders to initiate massive capital outlays. Interestingly, the study found no evidence of a widespread shift toward “asset-light” business models, nor did it find that credit constraints were a primary barrier to growth.
A Differentiated Recovery
The recovery path for investment also varied significantly based on corporate ownership:
- Indian Business Groups: Demonstrated the most consistent and sustained recovery in investment.
- Indian Private Firms: Showed initial post-pandemic gains that eventually plateaued.
- Foreign-Owned Firms: Experienced a continued decline in weighted average investment intensity after peaking in FY20.
The report also clarified that the high investment figures seen in FY20 were somewhat inflated by an “outlier spike” from a few large, asset-rich corporations. As that anomaly normalized, the subsequent growth trajectory appears more tempered.
Policy Recommendations
To bridge the gap and encourage a new wave of capital expenditure, the EAC-PM working paper suggests that the government must maintain its focus on stimulating the private sector. Key recommendations include:
- Continuing and intensifying Production-Linked Incentive (PLI) schemes to incentivize industrial capacity.
- Expanding public infrastructure investment to “crowd in” private sector participation.
- Strengthening the ecosystem for innovation by fostering deeper ties between industry and academia.
- Improving the ease of doing business through faster contract enforcement and more efficient commercial dispute resolution.
As the Indian economy continues its transition, this post-Covid profits rise faster than investment trend remains a critical focal point for policymakers aiming to sustain long-term industrial momentum.
