According to a working paper by the Economic Advisory Council to the Prime Minister (EAC-PM), the size of median Indian firms increased across key financial measures after the Covid-19 pandemic. The study, titled 'An investigation into corporate profits and investment', analysed firm-level data from the Centre for Monitoring Indian Economy's (CMIE's) Prowess database and examined corporate profits and investment trends from FY2008-09 to FY2023-24. The study included 9,577 companies and found that median capital employed increased from ₹1,674.9 million in FY2020-21 to ₹1,994.2 million in FY2023-24, while median revenue rose from ₹1,943 million to ₹2,736.5 million during the same period. Median PBIT also increased from ₹145.3 million in FY2020-21 to ₹232 million in FY2023-24, with median ROA improving from around 4.4 per cent in FY2020-21 to 7.2 per cent in FY2023-24, and further rising to 7.7 per cent in FY2024-25.
The EAC-PM study reveals a significant gap between corporate profitability and investment recovery in India's post-pandemic landscape. Aggregate PBIT grew 21.4 per cent year-on-year in FY2023-24, while gross fixed assets rose just 6.1 per cent, creating a 15.3 percentage-point gap between the two metrics. As per the report, this matters because investment decisions depend less on profits earned on existing assets than on the expected return on the next unit of capital. The paper finds evidence of downward pressure on investment from declining marginal profitability, with firms able to remain profitable on existing assets while postponing fresh capital expenditure if new capacity is not expected to generate comparable returns. The share of PBIT in gross domestic product (GDP) rose rapidly after the Covid-19 pandemic to around 15.7 per cent in FY2023-24, up from 11.2 per cent in FY2019-20.
According to the EAC-PM report, the nature of India's post-pandemic investment recovery has changed significantly. The FY20 investment peak was driven by a spike in investment intensity among large, asset-rich companies, with corporate assets concentrated around firms recording investment intensity of 12-14 per cent. Those high-intensity outliers disappeared during the pandemic and have not re-emerged. Instead, the post-pandemic recovery has been driven by a broad-based increase in investment intensity among firms around the median of the distribution. The paper noted that an absence of this spike in recent years can be explained by an absence of 'superstar firms' operating in sub-sectors expected to drive global factor productivity, particularly generative artificial intelligence and related sub-sectors. The study found a cyclical pattern in corporate investment, with major investment peaks in FY2008-09, FY2014-15 and FY2019-20, followed by periods of weaker investment and gradual recovery.
The recovery has varied significantly by ownership structure, with investment intensity among Indian business groups falling during the first year of the pandemic but gradually recovering since then. Indian private companies saw a partial recovery in FY2021-22, but their investment intensity has remained largely unchanged since. Foreign-owned companies have been the exception, recording a continuous decline in investment intensity after the FY2019-20 peak. Manufacturing firms had higher investment intensity than other companies until FY2014-15, with manufacturing and non-financial services firms contributing almost equally to the investment-to-GDP ratio at the FY2019-20 peak. After the pandemic, manufacturing investment intensity recovered to levels seen in FY2018-19. The paper noted that larger and more asset-rich companies have higher investment intensity and play a major role in driving overall investment, with companies potentially investing ahead of expected demand and waiting for existing capacity utilisation before starting another investment cycle.
According to the EAC-PM report, generative AI is identified as a potential reason for investment deferral, as firms may limit spending on existing technologies because rapid technological change could make those assets obsolete faster. The paper noted that firms are likely to limit their investments in existing technology in anticipation of faster depreciation, and this effect is likely to reduce once the newer technological landscape becomes relatively stable. The authors also flagged generative AI as a potential reason for investment deferral, as firms may limit spending on existing technologies because rapid technological change could make those assets obsolete faster. Government-owned firms and Indian private companies saw a muted initial recovery, followed by a decline or broadly flat trend through FY24.
