Since the announcement to cut the corporate tax rate in September 2019, hopes for a revival of corporate investment in India are yet to materialise. India’s nominal investments (GFCF + change in stocks) were 31.1 per cent of GDP in FY19 and averaged 30 per cent of GDP over FY17-19. Investments were similar at around 30 per cent of GDP in FY23 and 1HFY24. Of this, our estimates suggest that corporate investments declined to 12.5-13 per cent of GDP in FY23 and 1HFY24 from 15 per cent of GDP in FY19. This accounted for 43-44 per cent of total investments, marking the lowest share in two decades and lower than around 50 per cent in the pre-Covid years. In contrast, household and government investments have been very strong during the past 2-3 years. But why aren’t corporate investments picking up?
Profits of the listed corporate sector more than doubled to around 4.5 per cent of GDP in the last couple of years (post-pandemic) from less than 2 per cent of GDP in FY20. The outstanding debt of the listed companies has fallen to 13.4 per cent of GDP in FY23, from 16-17 per cent in the pre-Covid years. Their cash positions have improved markedly over this period, and these companies have gained market share. In line with their improved financial positions, capex (using net block, capital work-in-progress, and inventories data from the balance sheet as well as depreciation from the P&L statement) of the listed sector has also increased to ₹12 trillion in FY23 from ₹6-8 trillion in the pre-pandemic years, implying an average growth of 37 per cent YoY in FY22-23 (and 14 per cent during FY20-23). In other words, the listed sector’s investments increased to 4.4 per cent of GDP each in FY22 and FY23 from around 4 per cent of GDP in the pre-Covid period. Considering such remarkable improvements in their financial positions and capex, the failure in the revival of India’s investment-to-GDP ratio appears even more perplexing.
Can the unlisted corporate sector be one of the possible explanations for reducing corporate investments? Our estimates, using the residual approach, suggest that the unlisted corporate sector is much larger than the listed sector — it accounts for two-thirds of the gross value added by India’s corporate sector and about three-fourths of corporate debt in the country. Further, the unlisted corporate sector’s share in India’s aggregate corporate profits (before and after taxes) has fallen to almost half in recent years, along with the decline in its share of corporate taxes paid (to 50-55 per cent). Therefore, in stark contrast to the improved financial position of the listed corporate sector, the financial position of the unlisted sector has weakened (vis-à-vis the pre-Covid years).
Using the same narrative then, lower profits and the loss in market share do not provide much incentives for the larger unlisted corporate sector to invest. As against a CAGR of around 37 per cent in FY22-23 (and 14 per cent CAGR in FY20-23) in investments of the listed corporate sector, capex of the unlisted corporate sector has increased at a modest pace of 14 per cent (and 4 per cent). Consequently, the share of the unlisted sector has fallen to 67 per cent of corporate investments from 73-74 per cent in the pre-FY20 period. For the lack of a better alphabet, we use K-shaped recovery to highlight the divergent recovery trends. It is, nevertheless, not strictly correct. Both the listed and unlisted corporate sectors have experienced an improvement in their financial positions in FY22/FY23 vs. FY21. However, the listed companies (upper hand of the K-letter) have a much steeper slope than the unlisted companies (lower hand).
What explains this stark divergence in the financial positions of the listed and unlisted corporate sectors? Why is it that the former has witnessed a massive improvement (vis-à-vis pre-Covid period), while the latter has seen deterioration, pulling corporate investments? We can think of two possible reasons, but there is not sufficient data to support or reject these theories.
Divergent recovery paths
First, it is possible that the divergent recovery paths within the corporate sector (with slower recovery in the unlisted sector) is a direct consequence of the divergent recovery paths within the consumer (or the household) sector. It would not be unfair to assume that the large low-middle to bottom of the consumer pyramid would be the primary consumer segment for the unlisted corporate sector, while the top of the pyramid would be the key segment for the large/listed companies. Since the top of the consumer pyramid is likely to have seen a disproportionate gain in the post-Covid period vis-à-vis low-middle to bottom section, this divergence in the consumer pyramid is also reflective in the corporate sector. The former section is also driving the premiumisation story, giving a huge boost to larger companies, including most of the listed sector.
Second, with a better financial position, higher equity, and improved market share, deleveraging by larger companies is rational. But even modest deleveraging by the unlisted sector in light of lost income/revenue (and possibly lower equity) may not be an optimal scenario for the economy. It is possible that small and micro enterprises (SMEs) and unincorporated enterprises were the key beneficiaries of various loan supports provided by the authorities during and after the pandemic, largely escaping the unlisted corporate sector. A large part of the SMEs and unincorporated enterprises is included in the household sector, whose spending (consumption + investments) growth in recent years amid weak (average) income growth has been highly supportive of GDP growth.
Could it be the case of under-reporting of total investments and thus, corporate investments? After all, GDP data has serious drawbacks. Well, if one believes that corporate investments are under-estimated, then corporate savings and thus, total domestic savings are also under-estimated to the same extent because current account balance, which is the difference between domestic savings and total investments, is a non-controversial data. Higher corporate savings mean higher corporate profits, which should have led to higher corporate tax collection from the unlisted corporate sector. India’s aggregate corporate tax receipts have been pretty strong in recent quarters/years; however, they also appear to be driven by the listed sector.
Total corporate tax receipts have reported a CAGR of 5.6 per cent during FY20-23, almost half of 11.5 per cent during FY16-FY19 (possibly led by the cut in corporate tax rates). The corresponding growth rates for the listed sector (from P&L statements) are 12.4 per cent and 6.7 per cent, while they are 0.8 per cent and 15.1 per cent, respectively, for the unlisted corporate sector (using the residual approach again). In 1HFY24 too, total corporate tax receipts grew 20.2 per cent YoY, almost entirely supported by 35 per cent YoY growth in the listed sector, implying just 4.2 per cent YoY growth in the unlisted sector. Thus, the weak financial position of the unlisted corporate sector (vs. pre-Covid years and listed sector) is a more plausible explanation to lower corporate investments, than the argument of under-estimation of corporate savings and investments.
The writer is Senior Group Vice President - Institutional Research - Economist, Motilal Oswal Financial Services Ltd, Views are personal