Post-pandemic trend: Strong divergence in corporate profit vs investment math captures policy attention
Post-Covid, corporate profits have beaten the pace of investment recovery in a major way. Companies are reaping greater returns from their current assets, while new investments are challenged by global uncertainties and rapid technological changes.
Corporate profits rebounded more robustly than investment following the Covid-19 pandemic, according to a working paper by the Economic Advisory Council to the Prime Minister (EAC-PM). Profit before interest and tax (PBIT) surged 21.4% in FY24, while gross fixed assets (GFA) grew by a comparatively modest 6.1%. Profitability improved, with the median return on assets reaching 7.2% in FY24 from 4.4% in FY21.
Investment has indeed recovered, but its pace has lagged behind the profit recovery, with GFA expanding 1.1% in FY21, 2.2% in FY22, 6.8% in FY23, and 6.1% in FY24, compared to PBIT's 15.2% increase in FY22, 12.8% in FY23, and 21.4% in FY24.
The disparity is largely due to strong earnings from existing assets failing to spur new capacity spending. Indications suggest that the returns from fresh fixed-asset investments have weakened post-pandemic, dampening the incentive for companies to invest in new projects. Factors like global economic uncertainty, trade disruptions, and the risk of rapid technological obsolescence may also be influencing investment decisions. However, the study did not directly link these factors to investment.
The analysis found no significant evidence of market concentration or financing constraints driving the profit-investment gap. Nor was there a widespread shift towards asset-light business models. Manufacturing companies seem to be extracting more output from their existing fixed assets, indicating better capacity utilization, which could bode well for a future investment cycle.
The paper recommended boosting production-linked incentive schemes, public infrastructure spending, fostering innovation, enhancing industry-academia collaboration, and expediting commercial dispute resolution.
Written by urgent.news from The Economic Times - Economy's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
