India’s growth is not just jobless, it’s also profitless

All in the red.
All in the red.
Image: REUTERS/Danish Siddiqui
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India’s high GDP growth is often criticised for not being accompanied by an increase in employment numbers. But then jobless growth isn’t the only problem the economy is faced with.

Neither have India’s corporates partaken—at least not enough—in the country’s fast-clipped economic rise. If anything, earnings have been languishing for the 500 largest companies by market capitalisation on the National Stock Exchange.

India Inc’s profits as a share of GDP stood at a 15-year-low of 2.8% in 2018, according to a report by the domestic broking firm Motilal Oswal Financial Services (MOFSL), released last week.

And the pain is not confined to the universe of listed companies. The corporate profit-to-GDP ratio for all companies, including privately held firms, dropped from 7.8% in 2008 to 3% last year.

The divergence between GDP growth and corporate profits bears a resemblance to India’s jobs market. During the 1970s and 1980s, when GDP grew between 3% and 4%, employment in India inched up by 2% per annum. In the 1990s, post the liberalisation of the economy, job growth slowed to 1% or even less. The ratio of GDP growth to employment growth is now less than 0.1%, revealed a report released in September 2018.

In a similar vein, between 2013 and 2018, India’s GDP grew at a compounded annual growth rate (CAGR) of 11%, dwarfing the 3.8% CAGR clocked by corporate profits.

The slowdown in corporate profit growth was, in large part, due to profit erosion at India’s state-owned banks, which have been reeling from the pile-up of bad loans in their books. Other sectors such as metals, and oil and gas, also weathered global macroeconomic storms resulting in stressed balance sheets.

Misery also struck the telecom sector lately. Profits at India’s major telcos were under pressure following the severe competition unleashed by Reliance Jio’s cheap data and call rates in 2016. The service is owned by Mukesh Ambani, India’s richest person, who heads the oil-to-retail conglomerate Reliance Industries Ltd, MOFSL noted.

But the worst pocket for profit was government-owned enterprises. The public sector units’ (PSU) share of profits to GDP was down from 1.8% in 2003 to 0.4% in 2018. “(This is) given the significant value migration away from public to private in sectors like banking, telecom, airlines, even as PSU heavy sectors like oil and gas and utilities have underperformed on profit growth versus underlying GDP growth,” added the report.

Amid the gloom, a few green patches were seen in sectors like autos, technology, private banks, and non-banking financial companies where profits as a share of GDP grew in the last decade.

Golden Years

The decline in the profits of Nifty 500 companies is a significant U-turn from the trend seen between 2003 and 2008. In the five-year period corporate profit-to-GDP ratio doubled from 2.8% to 5.5%, and profits of the Nifty 500 companies grew at a CAGR of 31% in the period—twice the pace of underlying GDP growth.

“This surge (between 2003 and 2008) was driven by the export, investment, and capex-oriented sectors. Over 2003-08, the global economy was growing at a fast clip, which helped export-oriented players. Capacity investment across sectors was also significant as the investment cycle took off,” added the report.

So, will India Inc revisit these golden years anytime soon?

The worst may be over and profits may have bottomed out. “It is expected that condition of the public sector banks may improve from here on, then some other sectors such as insurance, which saw some listing in the last couple of years may come up,” Gautam Duggad, head of research at MOFSL, told Quartz.