India Inc's remarkable post-pandemic profit recovery is approaching a turning point as the policy support that fuelled earnings growth begins to recede, according to a report by Elara Securities. While corporate profitability has rebounded sharply over the past five years, the brokerage believes the scope for further expansion has become increasingly limited amid fiscal consolidation, weak private investment and subdued wage growth.
The report notes that the corporate profit-to-GDP ratio for the BSE 1000 has climbed to 5.36 per cent from 1.44 per cent in June 2020, driven by lower corporate taxes, improved operational efficiency, operating leverage and supportive government policies. However, Elara argues that these tailwinds are now fading, making sustained growth in corporate profitability more challenging.
Fiscal Consolidation Reduces Corporate Profit Support
Using the Kalecki-Levy macroeconomic framework, Elara says fiscal deficits have played a far greater role in supporting corporate earnings than generally recognised. Its analysis of more than 25,000 listed and unlisted companies suggests that every 1 percentage point increase in the fiscal deficit is associated with a 1.3 per cent rise in corporate profit after tax (PAT).
While fiscal consolidation strengthens macroeconomic stability, it also reduces demand support for businesses, particularly at a time when private investment has yet to fill the gap left by lower government spending. The brokerage argues that India's post-pandemic earnings recovery was supported not only by operational improvements but also by fiscal stimulus, low interest rates, corporate balance-sheet repair and economic formalisation.
Private Investment Yet To Take Over
According to the report, the next phase of profit growth will require stronger private capital expenditure, but investment trends remain subdued.
Gross fixed capital formation has largely stagnated as a share of GDP since FY23, while the private non-financial corporate sector's share of total investment has declined from 40.3 per cent in FY16 to an estimated 33.4 per cent in FY25. At the same time, a widening trade deficit is expected to further weigh on corporate profitability during FY27.
Weak Wage Growth Could Weigh On Consumption
The brokerage also highlights widening inequality between profits and wages as a growing structural concern.
Although corporate profits have continued to rise, wage growth has remained subdued. Labour's share of gross output has declined from its pandemic peak, limiting household income growth and constraining private consumption, which accounts for nearly two-thirds of India's GDP.
Elara warns that weak consumption discourages fresh private investment, creating a cycle in which both investment and consumer demand become increasingly dependent on government support. Breaking this cycle would require either sustained policy measures, such as tax relief, or stronger employment generation to boost household incomes.
Profit Pool Becoming Increasingly Concentrated
The report also points to a growing concentration of corporate profits within the financial sector.
Banks now account for more than a quarter of the Nifty's aggregate profit pool, compared with around 13 per cent before the pandemic. In contrast, sectors including information technology, FMCG, oil and gas, and automobiles have seen their contribution decline over the same period.
Elara cautions that a profit pool dominated by fewer sectors reduces the diversity of corporate earnings and may increase vulnerability if growth in those sectors slows.
The brokerage concludes that India's corporate sector remains fundamentally strong, but the drivers of future earnings growth will need to shift from policy support towards higher private investment, stronger wage growth and broader-based domestic demand. Without these structural improvements, the post-pandemic surge in corporate profitability is unlikely to be repeated. |
