India's corporate profit-to-GDP ratio, which dropped to more than a decade's low of 2 per cent in FY18, saw a marginal improvement to 2.1 per cent last fiscal. The figure is still the second lowest since 2006 but this minor development cannot be ignored either, raising hopes of further acceleration. A majority of companies are in the process of filing annual reports for fiscal year 2019, which carries their audited financial data.
However, we managed to move ahead with the FY19 unaudited data of BSE-500 companies for the analysis. The constituents of the index cover all major industries in the Indian economy.
- The profit-to-GDP ratio has been on a downward trend since its 14-year high of 4.7 per cent in 2007/08 and reduced to half its peak value at 2.1 per cent currently. In the pre-financial crisis period, the metric jumped from 3.6 per cent in 2005/06 to 4.3 per cent in 2006/07.
- Subdued corporate earnings caused the deterioration in the BSE-500 profit-to-GDP ratio over the decade. The profit after tax got restricted to single-digit growth between 2012-15. In FY18, the aggregate growth shrank to 11.2 per cent, pulling down the ratio to a decade low figure.
- The growth in profits was nowhere near the economic growth of the country. The earnings growth of BSE-500 companies almost remained flat at 1.8 per cent over the last five years while the nominal GDP witnessed a steady double-digit growth of 11.1 per cent during the period.