Indian corporate profits as a percentage of gross domestic product (GDP) have surged to a 15-year high, driven by significant gains in the financial, energy, and automotive sectors. This remarkable growth underscores the resilience and strategic positioning of Indian companies amid varying economic conditions.

The Numbers Speak: A Record-Breaking Year

According to a recent analysis by Motilal Oswal, the profit-to-GDP ratio for Nifty 500 companies climbed to 4.8 percent in FY23-24, up from 4 percent in the previous fiscal year. When considering all listed companies, this ratio improves to 5.2 percent. The financial, energy (particularly oil and gas), and auto sectors were the primary contributors, accounting for 95 percent of this growth. The Nifty 500 profit witnessed a 30 percent year-on-year increase in FY24, a significant jump from the 9.3 percent growth recorded in FY23.

Sector-Specific Performance

The last quarter of FY24 was particularly robust, with earnings growth for 200 leading firms exceeding 20 percent year-on-year, surpassing consensus estimates by 500 basis points. Nomura’s recent note highlights strong annual growth in financial, auto, real estate, capital goods, and healthcare sectors. Conversely, commodities (especially metals), chemicals, and consumer staples exhibited weaker growth. The IT services sector also experienced single-digit growth, signaling ongoing challenges.

Future Prospects and Sectoral Insights

Experts predict further improvement in the profit-to-GDP ratio for the current fiscal year. G. Chokkalingam, founder of Economics, notes that credit growth reached 16 percent in FY24, with asset quality at its best in a decade. Improved asset quality reduces the need for provisioning, thereby enhancing profitability in the financial sector.

The IT sector’s profitability is expected to rebound, contributing positively to the overall ratio. Additionally, financial and auto sector profits are projected to remain strong. Telecom sector profitability is anticipated to increase due to tariff hikes, while the cement sector is expected to see improvements in the latter half of the year. With an economy projected to grow over 7 percent and a normal monsoon forecasted, the nominal GDP growth of 9.6 percent year-on-year in FY24, though lower than corporate profit growth, sets a promising backdrop.

Historical Context: From Decline to Recovery

The profit-to-GDP ratio saw a steady decline between FY11 and FY20, with FY17 being an exception. The COVID-19 pandemic pushed this ratio to a two-decade low of 2.1 percent in FY20. However, a turnaround began in FY17 due to better performance in global cyclicals (metals and energy) and reduced losses in public sector banks. Recent years have seen corporate profit growth outpacing GDP growth, thanks to improved net profit margins despite sluggish revenue growth.

The remarkable rise in Indian corporate profits as a percentage of GDP highlights the strategic resilience and growth potential of Indian companies. With strong sectoral performances, particularly in finance, energy, and auto industries, and promising economic indicators, the profit-to-GDP ratio is poised for further improvement in the coming years. The sustained focus on enhancing asset quality and profitability across various sectors will be crucial in maintaining this upward trajectory.