India's corporate profits one of the lowest among major economies

Combined net profit of BSE500 companies at $63 bn is 2.3% of GDP; global average is 5%

India’s corporate profit to gross domestic product (GDP) ratio is one of the lowest among major emerging and developed economies. 

The combined net profit of BSE500 companies at $63 billion is equivalent to 2.31 per cent of the country’s GDP against 6.1 cent in the US, 4.24 per cent in Brazil, 3.63 per cent in China, 2.35 per cent in Indonesia, 3.54 per cent in Vietnam, 5.29 per cent in South Korea, and 15.9 per cent in South Africa.

Only Mexico has a lower ratio than India at 1.71 per cent, according to data from Bloomberg and the International Monetary Fund (IMF).  Analysts, however, said this could because of lower representation of the country’s corporate sector on its bourses. 

The Mexico broad-based index is one of the smallest, with only 95 companies together accounting for just a quarter of the country’s GDP in terms of revenues and profits. The corresponding ratio for India is around 48 per cent and 68 per cent, respectively.

In comparison, globally, corporate earnings account for nearly 5 per cent of the underlying GDP, up from 4.7 per cent five years ago. 

In the past five years, the earnings to GDP ratio has declined for Indian markets against a global trend of an expansion.  For example, the ratio was 4 per cent in India during the financial year 2013-14, slightly lower than the global average but ahead of most other emerging market that year. 

Corporate India has also underperformed its global peers in terms of earnings growth in the past five-years.

The combined net profit of BSE500 index companies is down 15.4 per cent cumulatively in dollar terms in the past five years against 23.4 per cent growth in global corporate earnings during the period. The UK is the only other major economy with a contraction in corporate earnings.  In comparison, companies in France, China, the US, South Korea, and Japan topped earnings growth among major economies. Companies in Vietnam grew fastest, though growth came on a smaller base.

The analysis is based on the combined earnings of companies that are part of the broad-based indices in respective markets such as BSE500, S&P500, Nikkei 500, Shanghai 800, FTSE 300, Kospi 300 and Jakarta Composite among others. All numbers are in US dollar terms.

Analysts attribute corporate India’s poor performance to industrial slowdown and its spillover effect on bank earnings.  “There has been a sharp decline in corporate earnings including large losses in investment-related sectors and corporate banks in the past few years. This has pulled down the overall numbers for corporate India,” said G Chokkalingam, founder and managing director, Equinomics Research & Advisory Services.

A poor show by corporate banks, especially government-owned ones, and capital goods, infrastructure and metal companies more than erased the gains made by consumer goods companies, retail lenders, and informational technology exporters.

Others, however, raise a more fundamental issue of India’s growth not being productive enough anymore. 

“The fall in earnings to GDP ratio shows that India’s headline GDP growth is not happening in productive sectors. Growth could be happening in sectors were corporate entities don’t operate much such as personal services, agriculture, retail and trading,” said Dhananjay Sinha, head of strategy and chief economist, IDFC Securities.