While the economy is showing signs of a slowdown with lower production levels, declining demand and heavy losses to shareholders, the corporates are earning high profits.
India’s officially lowered GDP growth projection may be underestimating the true extent of the economic slowdown. A volatile stock market and sluggish industrial activity add to concerns. Since October 2024, India has lost nearly Rs 1 lakh crore due to capital flight.
The latest financial shock comes from IndusInd Bank, whose shares plunged 27per cent, erasing Rs 19000 crore in market value after disclosing Rs 2,300 crore in derivatives accounting discrepancies, which reduced its net worth by 2.4 per cent. The banking sector faces increasing credit risks, with rising defaults on loans, mortgages, credit cards, and fixed-income securities.
At the same time, structural issues continue to cloud economic assessments. Academics and institutional experts have pointed out flaws in official GDP estimates, with the IMF recommending an overhaul of real-sector statistics. India’s GDP figures, once considered reliable, are now under scrutiny due to limited data availability, opaque methodologies, and inconsistencies with independent indicators.
Challenges in Economic Measurement
Unlike economies dominated by manufacturing, India’s service-driven economic structure presents additional statistical challenges. In industrial sectors, output is tangible and pricing is straightforward, making valuations easier. However, measuring service sector output is complex, leading to concerns about data accuracy. For instance, claims of unemployment falling to 3 per cent have been met with scepticism.
The agriculture sector, a key driver of rural employment, also shows signs of slowing growth. The gross value added (GVA) in agriculture and allied sectors grew just 1.2 per cent year-on-year in Q2 of FY 2024-25, a sharp drop from 2.5 per cent a year ago.
Slower Growth Amid Structural Weaknesses
India’s economic growth is projected at 6.4 per cent for FY 2024-25—the slowest pace in four years from 8.2 per cent in 2023-24. Key factors behind this slowdown include a struggling manufacturing sector, sluggish corporate investments, and weak wage growth, which is limiting discretionary spending. High inflation and uneven income distribution are straining household budgets.
To stabilize the economy, India must rethink its revenue strategy. While raising taxes is politically unviable, alternative measures are needed to boost income and spending.
The nominal GDP growth rate, which includes real GDP growth and inflation, is estimated at 9.7 per cent in 2024-25—lower than the 10.5 per cent projected in the last Union Budget. High inflation has driven corporate profits to an average of 22 per cent, yet in real terms, it is slowing overall economic activity.
Corporate Profits vs. Economic Growth
While businesses have seen soaring earnings, they are hesitant to reinvest due to market uncertainties and the fear of predatory competition from domestic rivals. A recent Blackwall move targeting Indian corporates could further destabilize market confidence. The concerns need to be addressed to build market trust.
The IMF expects India’s GDP growth to moderate to 6.5 per cent in 2025, citing a sharper-than-expected decline in industrial activity. Public debt remains a pressing issue. Government debt has surged from Rs 49 lakh crore in 2014 to Rs 205 lakh crore in 2024 (Rs 255 lakh crore including state debt). The central government’s debt-to-GDP ratio is projected at 57.1 per cent in 2024-25, while total public debt accounts for 33 per cent of GDP. India’s external debt stands at $711.8 billion, or 19.4 per cent of GDP. The IMF estimates that India’s debt-to-GDP ratio will peak at 82.3 per cent in FY 25-26 before declining to 80.5 per cent by FY 2029-30.
High Debt, High Private Profits
Despite the economic slowdown, India’s corporate sector is witnessing record earnings. According to the Economic Survey 2024-25, the profit-to-GDP ratio for NIFTY 500 companies surged from 2.1 per cent in FY2023-24 to 4.8 per cent in FY24 25, the highest level since 2007-08. However, corporate profits are not translating into overall economic growth.
Chief Economic Advisor V. Anantha Nageswaran has pointed out that companies are inflating consumer prices while keeping wages low, making them primary contributors to inflation rather than responding to real demand. The question arises: Is government debt fuelling private profits? In other words, taxpayer money is indirectly supporting corporate earnings, even as the broader economy experiences one of its steepest slowdowns.
Corporate profits can rise even with weak consumer demand if companies increase prices faster than production costs. This “pricing power” often comes from market dominance, supply chain constraints, or strong brand perception. The construction sector, for example, is estimated to grow at 8-10 per cent in FY 25-26, benefiting from public infrastructure spending. In FY24-25, it grew by 12-15 per cent, fuelled by government-backed projects.
Real Estate Boom and Inflationary Pressures
The real estate sector is also experiencing strong growth. Housing sales reached an 11-year high in the January-June 2024 period, with 1.73 lakh units sold, according to Knight Frank. Profit margins in the sector range from 15-25 per cent. The RBI’s rate cuts have fuelled the boom even as individual savers see reduced returns on deposits.
Toll charges on highways have also increased, raising transport costs and contributing to inflation.
Manufacturing Sector’s Struggles
Paradoxically, India’s manufacturing sector is slowing despite rising corporate profits. The official explanation points to global competition, but domestic challenges, including high input costs and regulatory hurdles, also play a role. Business groups with close political ties enjoy advantages often at the expense of fair market competition.
This proximity between businesses and political power raises concerns. While select companies benefit, the broader economy suffers and lowers India’s living standards. Despite being a $3 trillion economy, India’s per capita income remains well below that of Russia, which has a smaller $2 trillion economy.
In a nutshell, the paradox of the Indian economy is a study of contradictions.
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