Industrial growth slips even as corporate profits soar to historic highs

Amidst the pandemic gloom and weak economic recovery, corporate profits have soared and reached historic highs, just like stock markets. In FY21, the net profit of listed companies (more than 4,000) recorded a historic high, up 57.6% to ₹5.31 lakh crore, and its share in the GDP hit a 10-year high of 2.63%.

Commenting on the performance of top 500 listed companies it tracks, Fortune India commented: “This is the first time since 2010 – when Fortune India began chronicling Indian corporates in the marquee listing – that year-on-year (Y-o-Y) revenue growth slid 2.4% in FY21. But, profit turned out to be the best-ever – growing at a record 75% Y-o-Y to ₹6.22 lakh crore, a resounding turnaround from last year when the Fortune 500 universe saw its cumulative profit decline 22% Y-o-Y to ₹3.6 lakh crore.”

The reasons for this are known: steep corporate tax cut (₹1.45 lakh crore in September 2019), cheap credit, better cost efficiencies, etc. Lesser commented aspect is cut in jobs and wages.

The trend continues in FY22 and a new historic high is expected. Fortune India has reported that in the first two quarters (H1) of FY22, net profits of listed companies (more than 4,000) have recorded “over 80% of the full-year profit” of FY21.

This trend is in sharp contrast to the overall state of the economy.

In FY21, the GDP growth slipped to -7.3% – one of the worst in the world – and in FY22, it is expected to be 9.5% but effectively only 1.6% over FY20 (4% GDP growth), as the finance ministry’s monthly report of November 2021 said. Besides, the annual average GDP growth in 15 years preceding FY20 – between FY05 and FY19 – was far higher at 7%. Corporate profits didn’t soar to such highs then.

Besides, during the pandemic, nearly half a million Indians (more than 4.5 lakh) lost their lives to the Covid-19 virus and more than 34 million got infected by it – both entailing high health expenditure, which in normal years pushes 60 million Indians into poverty every year, as the government officially admitted while launching the Ayushman Bharat (PM-JAY) scheme in 2018.

How many have lost jobs and businesses (particularly micro and small ones) during the pandemic crisis is not known. Multiple studies have shown jobs have shifted from high-productive and high-income organised/formal sector to low-productive and low-income unorganised/informal sector like agriculture. The demand for menial and low-paying MGNREGS jobs has skyrocketed due to reverse migration and rural distress.

All these developments reflect massive loss of household incomes and poor consumption demand – all of which reduce future growth prospects too.

There is yet another disconnect.

Growth in industrial production hit new lows

The latest data on growth in industrial production, measured by Index of Industrial Production (IIP), paints a dismal picture. In October 2021 (festive season of high sale), the overall (general) IIP grew (monthly) at 3.2%, manufacturing IIP at 2% and electricity at 3.1%. The only one which grew robustly was mining (11.4%).

The long-term, annual growth in IIP (both overall and manufacturing mirror the trend) presents a gloomy picture too. The annual average growth in IIP has been less than 5% in the 2011-12 IIP series, sliding to -0.8% in FY20 (pre-pandemic) and -8.4% in FY21. The average annual growth in IIP during FY13-FY21 is 1.9%. This is way lower than the annual average of 8% during FY06-FY12 under the 2004-05 IIP series.

Similarly, monthly growth in production of two categories that indicate future growth prospects and robustness of household finances – capital goods and consumer durables – fell during October 2021. Capital goods saw the growth declining to -1.1% and consumer durables to -6.1%. Their annual growth rates are not encouraging either. Capital goods grew at -13.9% and consumer durables -8.7% in the pre-pandemic year of FY20.

Lower growth in IIP reflects lower demand in the economy to produce goods. Low growth rate of FY20 is a reflection of pre-pandemic slowdown.

Capacity utilisation in manufacturing at several years’ low

Capacity utilisation (CU) in manufacturing is another indicator of the health of industry as it measures actual production of manufacturing products against the installed capacity. A low CU means low demand for manufacturing goods in the economy, just as low IIP growth is.

Latest data shows capacity utilisation in Q1 of FY22 fell to 60%, from 73% in the corresponding first quarter FY20. Long-term trends show a prolonged slowdown. In fact, CU has fallen far below 80% or more recorded during FY10-FY11.

Growth in pending orders and inventory-to-sales are improving but that is more of a reflection of pent-up demand following the pandemic disruptions.

Why the disconnect?

Why there is a disconnect between soaring corporate profit (both manufacturing and services) and falling industrial production and capacity utilisation is not difficult to decipher.

One obvious answer is that banking and non-banking financial companies (apart from oil and gas and IT services) form a big chunk of the profit-making corporations. Fortune India’s analysis of top 500 companies in FY21 said banks topped the list at over 20% (₹1.27 lakh crore) of the profit.

Banks don’t themselves produce goods and services in an economy to propel growth; they facilitate it, but to what extent is not known. What is known is that in FY21, growth in bank credits (year-on-year) to industry fell to -0.3% and to large industry it fell even more to -1.7%. To the services, it grew by 2% and to agriculture by 9.8% – both sectors have a large presence of low-productive and low-income informal work.

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

Credit growth to the personal loan segment alone has registered double-digit growth every year since FY15 – when overall credit to non-food sector fell to single digit. Services saw double digit growth only in three of these seven years, in FY17, FY18 and FY19.

The disconnect between financial sector, like banks and non-banking financial institutions, and real economy is not exactly unknown but that is for another time.