3 Companies are deleveraging rather than investing

Labour markets lagging behind output growth has led to what has been termed as profit led growth in the Indian economy in the last fiscal year.

A June 8 research note by Soumya Kanti Ghosh, Group Chief Economic Advisor at the State Bank of India shows this clearly. Ghosh looked at results of 1000 listed companies for 2020-21 and found that profits grew at a much faster pace than revenues in most sectors. “We observed a 4% decline in top line (revenue), while EBIDTA and Profit after Taxes (PAT) grew by 19% and 54% respectively over FY20. However, excluding BFSI (banks, financial services and insurance) and refineries, the set reported 2% growth in top line and 36% and

34% growth in EBIDTA and PAT”, the note said.

Lack of demand, reflected in poor revenue growth, also means that companies are deleveraging instead of investing even though the monetary policy environment continues to be accommodative. “One direct corollary of the pandemic in FY21 was a distinct slowdown in bank credit growth that has also continued into FY22. We believe such low credit growth was a direct fallout of corporates rapidly deleveraging by repaying high-cost loans through funds raised through bond issuances”, the note added.” Interestingly, corporate willingness for new investments remains low currently as the economy is still recovering from the devastating second wave.”

If firms continue to behave prioritise deleveraging instead of investing, it is bound to perpetuate a vicious cycle of low investment demand leading to low mass incomes leading to low consumption demand, which will generate further headwinds for investment demand.

This is exactly where the role of a fiscal stimulus, which can give a boost to mass demand and break this vicious cycle, comes in.