Rising Corporate Profits Aren’t Good News for Indian Economy

Salaam seth salaam seth kuch apne layak kaam seth,
Aap to khaayen murgh musallam apni to bus rice plate. 
­– Shaily Shailendra, Annu Mallik (now known as Anu Malik), Annu Mallik and Kawal Sharma, in Jeete Hain Shaan Se.

Corporates have reported bumper profits for the period July to September 2020.

This led a friend, who is generally unhappy with most of my writing given that he dabbles in the stock market which just keeps going up, to quip: “How are the corporates making profits if the economy is not doing well?

This is an interesting question and needs to be addressed. Having said that, the right question to ask is, how are the corporates making profits with the economy not doing well.

Let’s look at it pointwise.

1) A newsreport published in the Business Standard on November 17, 2020, considers the results of 2,672 listed companies, including their listed subsidiaries, for the period July to September 2020. During this period, the net profit of these companies touched a record Rs 1.52 lakh crore, up by 2.5 times in comparison to the same period in 2019.

2) There is a base effect at play here, with last year’s low base making profits this year look very high. During the period July to September 2019, telecom companies faced massive losses. Their losses have come down during the period July to September 2020. Take the case of Vodafone Idea. The company reported a loss of Rs 50,000 crore last year. The loss during July to September 2020 was much lower at Rs 6,451 crore. Similarly for Airtel, the loss came down from around Rs 23,000 crore last year to Rs 776 crore this year.

These losses pulled down overall corporate profits by close to Rs 73,000 crore, during the period July to September 2019. This time around the losses of these two telecom companies were limited Rs 7,227 crore. Hence, these two companies had a disproportionate negative impact on the overall corporate profits last year. The same hasn’t happened this year and in the process has ended up pushing up the overall corporate profit growth this year.

3) Interestingly, companies have managed to report an increase in net profit despite shrinking sales. The Business Standard report referred to earlier suggests that the net sales of these companies shrunk by 5.2% during July to September 2020. This is the fifth consecutive quarter when the sales of listed companies have shrunk. Depsite shrinking sales, profits have gone up.

4) Economist Mahesh Vyas of the Centre for Monitoring Indian Economy, looked at a sample of 1,675 listed manufacturing companies. He found that their combined net profit stood at Rs 72,600 crore, despite their net sales shirking by Rs 96,100 crore.

5) The question is how have companies managed to increase their net profit, despite doing less business than last year, leading to lower revenues. There are sectoral reasons at play. Thanks to the ongoing case in the Supreme Court, the banks did not have to report bad loans as bad loans. This has led to banks setting aside lesser money to meet the losses that may arise from these bad loans. This has clearly pushed up the profit number in the banking sector.

More specifically, the companies managed to cut more costs than they saw a fall in sales and thus pushed up their net profit.  Take the case of the manufacturing sector that Vyas has considered in his analysis, while their sales shrunk by Rs 91,600 crore, their operating expenses came down by Rs 1,33,100 crore or around Rs 1.33 lakh crore. The companies managed to drive down the cost of raw materials thanks to a favourable shift in trade terms and drawing down their inventories.

6) Other than driving down raw material cost, companies have also managed to cut down on employee costs. Economist Sajjid Chinoy of JP Morgan in a column in The Indian Express writes that net profit of companies went up despite shrinking revenues because “firms aggressively cut costs, including employee compensation.” “Indeed, a sample of about 600 listed firms reveals employee costs (as a per cent of EBITDA) was the lowest in 10 quarters,” he writes further.

A survey carried out by the Mint newspaper and Bain found that half of the companies had reduced employee costs by either firing employees or cutting their salaries.

The above points explain why corporate profits have gone up disproportionately despite shrinking revenues. Let’s try and understand pointwise why this is not good for the Indian economy.

1) A major reason for raw material costs coming down is a favourable shift in trade terms. What does this mean? No company produces everything on its own. It uses inputs which are produced by other firms. In difficult times, companies are able to drive down the cost at which they purchase things from their suppliers, that is, inputs. The suppliers are other companies, which have  to drive down their costs as well, and this is how things are pushed down the hierarchy.

How do suppliers and suppliers to suppliers drive down their costs? They also try to shift the trade terms in their favour and at the same time cut employee costs, like companies have.

2) This leads to what economists call the fallacy of composition or what is good for one may not be good for many. A simple example of this is someone going to watch a cricket match. He stands up to get a better view of the game being played and he gets a better view. But then the person behind him also needs to stand up to get a better view. And so the story continues. In the end, everyone is standing and watching the match, instead of siting comfortably and enjoying it. To repeat, what is good for one, may not be good for many.

How does this apply in the current case? When companies cut down on input costs, they are obviously paying a lower amount of money to their suppliers or not buying new raw material or as much raw material as they did in the past, to increase their inventory.

By cutting down on employee costs, they are either paying a lower amount of money to their employees or simply firing them. The suppliers in turn have to cut their costs in order to continue to be profitable or lose a lower amount of money. So, the cycle continues and in the end leads to lower incomes for everyone involved.

3) This leads to what the economist John Maynard Keynes called the paradox of thrift. With incomes coming down, people spend a lower amount of money than they did before. It is worth remembering here that ultimately one man’s spending is another man’s income, leading to a further cut in spending. Even those who haven’t seen a drop in their income or been fired, cut down on their spending. They are trying to save more, given the risk of them getting fired and not being able to find another job. This is the psychology of a recession and it is totally in place right now.

4) One of the ways of measuring the size of any economy or its gross domestic product (GDP), is to add the incomes of its different constituents. This means adding up rents, wages, interest and profits. While, profits of companies have been going up, individual wages have been going down, leading to lower spending and hence, lower private consumption. This explains why despite corporate profits of listed companies increasing at a fast pace, the GDP during the period July to September 2020, contracted by 7.54%.

5) An August 2019 report in the Business Standard said that the combined net profit of companies that make up for the BSE 500 index was at 2.31% of the GDP. Other studies suggest that this figure has constantly been coming down over the years. Despite the fact that listed companies form a small part of the Indian economy, their influence on the initial GDP figure is very high.

A large part of the Indian economy is informal. The measures representing this part of the economy cannot be generated quickly. In this scenario, the statisticians assume the informal economy to be a certain size of the formal one. Corporate profits are an important input into measuring the size of the formal economy. This is something that needs to be kept in mind while looking at the economic contraction of 7.54%. .

To conclude, while corporate profits going up is good news for the companies, there are many ifs and buts, that need to be taken into account as well, and on the whole the way these profits are being generated, it’s not good news for the Indian economy.

Also, over a longer period, the only way to grow profits is by growing sales. This will start hitting the Indian corporates sooner rather than later.

What a Mumbai Real Estate Agent Can Tell You About Indian Economy Contracting

Koi yahan aaha naache naache,
Koi wahan aahe naache naache.

— Usha Uthup, Faruk Kaiser, Bappi Lahiri and Babbar Subhash (better known as B Subhash), in the Disco Dancer

The gross domestic product (GDP) figures for the period July to September 2020 were published yesterday. The GDP is a measure of the economic size of a country during a particular period. The Indian GDP or the economic size of the country during the period contracted by 7.54%  against the same period last year.

This looks very good in comparison to the contraction of 23.92% that the economy had seen during the period April to June 2020 and has led to the uncorking of the bubbly among a certain set of politicians, economists, analysts, journalists, stock market wallahs and Twitter warriors.

Of course, there is no denying that a contraction of 7.54% is a lot better than a contraction of 23.92%, one would be a fool to deny that. But has the time to uncork the bubbly come? Or, if you are not the drinking type, should we be high-fiving on this one?

Let’s take a look at this pointwise.

1) For much of the period between April to June, the economy was under a lockdown. Once the economy was opened up, things were bound to improve. Hence, a better performance in July to September should not come as a surprise. Second, the period benefitted because of a lot of pent up demand. People who could not buy the stuff they wanted to during April to June, ended up buying it between July to September. These points need to be kept in mind.

2) The economists were expecting a contraction of 8.5-9% during the quarter. Against that a contraction of 7.54% looks just about a little better. Having said that, India has a large unorganised sector. Measuring the value added by the unorganised sector is never easy. Hence, when releasing GDP data for a period of three months for the first time, the National Statistical Office (NSO) essentially proxies the value added by the informal sector using formal sector data. This is set right as data streams in over a period of time.

Over and above this, we are in midst of a pandemic and hence, collection of data isn’t easy. As the NSO points in its release: “Some other data sources such as GST, interactions with professional bodies etc. were also referred to for corroborative evidence and these were clearly limited.”

What this means is that the GDP data presents a picture which is rosier than the actual picture.

3) There is another important point that needs to be made here. India has been publishing quarterly GDP for close to 24 years now. This is only the second time in all these years that the GDP during a particular period of three months has contracted. Only twice in 94 quarters has the economy contracted. And given that GDP has contracted in two consecutive quarters, India is in a midst of what economists call a technical recession. If the economy continues to contract in the months to come, it will enter a recession. That’s the difference between a recession and a technical recession.

Source: Centre for Monitoring Indian Economy.

4) In the period April to June with a contraction of 23.92%, India was the worst performing economy among the major economies in the world. From the data that is currently available on the OECD website, India is no longer the worst performing economy in the world, nonetheless, it continues to be among the worst performing economies in the world.

Source:  https://stats.oecd.org/index.aspx?queryid=350

5) A major surprise in the GDP data has been the recovery of the manufacturing sector. The sector grew by 0.62%, after contracting (or degrowing as analysts like to say) by 39.30% between April to June. While this is good news, it goes against the fact that index of industrial production contracted by 6.09% during July to September. If the production has contracted how has the growth come about? The growth has come primarily from the fact that companies in the listed space have been able to increase their profit margins primarily because of controlling costs, this includes firing employees and slashing their salaries.
As economist Mahesh Vyas recently wrote in a column: “In the September 2020 quarter, while sales fell again by 9.7 per cent, profits sprang a surprise by scaling up by a handsome 17.8 per cent. Yet, wages declined by one per cent. Evidently, companies do not apportion resources to labour in any proportion of profits.”

6) Sectors like construction, mining as well as services continued to remain weak, though better than they were during April to June. These sectors are high employment sectors. This remains a worry given that what seems to be happening currently is a recovery which isn’t creating enough jobs. In fact, financial services, real estate and professional services (bundled together for some reason in the GDP data) contracted by 8.09% during July to September. It had contracted by 5.33% during April to June. And that can’t possibly be a good thing. This can also be seen under NREGA data where demand for jobs this year remains astonishingly higher than last year. It can also be seen in the labour participation rate contracting with people stopping to look for jobs because they are unable to find one, and hence, dropping out of the workforce.

It also needs to be said here if there is a second round of covid, as is being feared, the services sector will continue to remain weak, in particular services like restaurants, hotels, tourism, cinema halls, malls etc.

7) If we look at GDP from the expenditure side, the private consumption expenditure contracted by 11.32% against a contraction of 26.68% between April to June. Clearly, there has been improvement on this front. Nevertheless, private consumption expenditure forms more than half of the Indian economy, and as long as it continues to remain weak, the economy will continue to remain weak. Also, we need to remember that the contraction of 11.32% happened despite pent up demand and festivals in the Western and Southern part of the country. Further, the fact that private consumption has continued to contract, brings into question the growth in the manufacturing sector. Are actual sales happening at the consumer level or is this simply a case of a  build-up of inventory, as has been the case in the auto industry?

8) This is a slightly technical point but still needs to be made. On the expenditure side, the GDP is calculated as a sum of private consumption expenditure, investment, government expenditure and net exports. Net exports is exports minus imports. In the Indian case, this is a negative entry into the GDP figure, given that exports are usually less than imports. During July to September, net exports is a positive number, given that imports are lower than exports, having fallen by a much higher rate. This is primarily because of a collapse in consumer demand, which is not a good thing. When it comes to the goods part of imports, the non-oil non-gold non-silver part of imports collapsed by 23.82% during July to September. This helped push up the GDP number.

9) The GDP has contracted by 15.67% during the first six months of the year. If the economy contracts by 3-5% during the second half of the year, we still are looking at 9-10% contraction this year. This was largely the consensus forecast made for this year. Even if there is no contraction in the second half of the year, the economy will still contract 7.66%, which will make India one of the worst performing economies in 2020-21. Also, we need to remember that the GDP of 2019-20 is likely to be crossed now only in late 2021-22 or 2022-23. So this pushes the Indian economy back by at least two years. Of course a lot of it is because of covid, but let’s not forget, the Indian economy had been slowing down even before the pandemic struck.

10) Let me close this piece with a little story. Sometime in April 2006, I first started to look for a flat to rent, in Mumbai. Of course, one had to go through agents. Pretty soon, I realised that the agents were trying a psychological trick on me. They first showed me a flat which was in a very bad state. They would then show me something which was slightly better. Nevertheless, the difference in rent between the flat was much more than the difference in their quality, with the rent of the second flat being much more than the first one. I caught on to this because I had read this book called Freakonomics sometime in 2005. The book had an extended chapter on the contrast effect.

We all tend to compare things before making a decision. Given this, the attraction of an option can be increased significantly by comparing it to a similar, but worse alternative. This is known as the ‘contrast effect’.

How does this apply in the present context? It’s simple. The fact that the Indian economy contracted by a massive 23.92% during April to June, it makes a contraction of 7.54% during July to September, much better. But there are many nuances, as explained above, that need to be taken into account.

PS: My writing has been highly irregular over the last few weeks. I was busy with a project I had taken on. Now that I am done with it, will write more regularly.

Propaganda 101: What the Indian Right has learnt from Big Tobacco

The Indian economy as measured by the gross domestic product (GDP) contracted by 23.9% during April to June 2020 in comparison to the same period in 2019. This contraction was huge.

But soon journalists, economists, corporate honchos and analysts, who are close to the current dispensation, started telling us that, so what if India has contracted by 23.9%, the American economy contracted by 32% during the same period. The point being that if India was in trouble, America was in bigger trouble. How did this lessen our trouble they didn’t bother to explain.

There was an even bigger problem with the 32% American contraction figure. It was wrong, when compared to India’s 23.9% contraction. The way India calculates GDP contraction (or growth for that matter) and the way America does it, are different.

So, what was the American contraction if we used the Indian method? It was 9.1% year on year and not 32% as was being suggested. (For those interested in the fifth- standard maths behind this, I suggest you Google it. It has been explained by multiple people, including me).

Also, none of the people who sincerely believed that the American economy had contracted by 32%, bothered to sit back and think the negative impact this would have had on the world at large.

Data from the World Bank suggests that in 2019, the American GDP (real GDP adjusted for inflation), had stood at $18.3 trillion.
This was around 21.7% or somewhere between a fourth and a fifth of the global GDP. Now imagine the American economy contracting by a third (which is what a 32% contraction almost means) year on year. This would have led the world into a second Great Depression.

America is the world’s largest source of consumer demand. If that demand contracts by a third, the global economy would have been in an even worse situation than it currently is. This simple thought did not occur to anyone who went around town telling people that the American economy had contracted by 32% and hence, had done much worse than the Indian economy. Or maybe it did occur to them, and they simply chose to ignore it.

The Indian GDP numbers for April to June were declared on August 31. This was almost four weeks back. The social media is still buzzing with this issue.

Do the people who spread the story of the US economy contracting by 32% to counter the Indian economy’s contraction of 23.9%, not understand basic fifth standard maths? Because a simple understanding of fifth standard maths would have told them very clearly that the US economy had contracted by 9.1%, if the contraction is calculated in the Indian way.

Obviously, this bunch of people is a smart lot and I don’t think there is any problem with their understanding of fifth standard maths. So, what were they up to then? They were basically borrowing a simple idea first used by Big Tobacco Companies in the 1950s.

In the early 1950s, research which linked the smoking of cigarettes to incidence of lung cancer, started to come out. Big Tobacco Companies met at the Plaza Hotel in New York, just before Christmas in 1953. Scientific research which was being published was making them look very bad. And they had to do something about it.

What did they do? As Tim Harford writes in How to Make the World Add Up: Ten Rules for Thinking Differently About Numbers: “They muddied the waters. They questioned the existing research; they called for more research; they funded research into other things they might persuade the media to get excited about, such as sick building syndrome or mad cow disease. They manufactured doubt. A secret industry memo later reminded insiders that ‘doubt is our product’.”

How did muddying the waters help Big Tobacco? It basically created confusion in the minds of smokers. Was the research linking smoking to lung cancer, right? Was there enough evidence of it? Aren’t correlation and causation two different things? These were the questions that the smokers were suddenly asking themselves.

As Harford writes: “Smokers liked smoking, were physically dependent on nicotine, and wanted to keep smoking if they could. A situation where smokers shrugged and said to themselves. ‘I can’t figure out all these confusing claims’ was a situation that suited the tobacco industry well.”

Big tobacco wasn’t trying to tell smokers that smoking was safe. They weren’t so blatant about it. All they were trying to do was to ‘create doubt about the statistical evidence that showed they were dangerous’.

The muddying of waters to create doubt has been a standard part of propaganda since then. It’s propaganda 101. As Harford summarises it: “Their answer [that of Big Tobacco companies] was – alas – quite brilliant, and set the standard for propaganda ever since.”

Something very similar happened in case of the Indian economy contracting by 23.9%, as well. The fact that the Indian economy contracted by close to a fourth, was something that the sympathisers couldn’t deny. It was official government data. And of course, that this contraction was bad for the average Indian, couldn’t be denied either.

But the waters could be muddied by getting the American angle in. The message was that so what if the Indian economy has contracted and Indians are suffering, the Americans are suffering more.

The sad part of all this is that many educated Indians fells for this spin. But that’s the thing with propaganda, even the educated fall for it.

This piece originally appeared in the Deccan Herald on September 27, 2020. 

In April to June 2021, India May Grow by 15-30%, But We’ll Still Be Catching Up

Summary: Base effect – The collapse in GDP during the April to June 2020 is going to make the GDP growth during April to June 2021 look fantastic.

I want to make a prediction here. And this is a fairly easy one.

A year from now, in early September 2021, you will see a spate of WhatsApp forwards and social media posts, which will say that India is the fastest growing large economy in the world.

And unlike most other times, when WhatsApp forwards and the social media are either trying to outrightly lie and if not that, then at least trying to mislead, this time around they will be 100% correct.

Of course, this grand success will be attributed to the greatness of the current government. And that’s where the misleading part will come in again.

All that will happen is the base effect will come into play. Now what’s the base effect? Instead of me giving you a definition and confusing you, let’s try and understand this in some detail, but in a simple way.

For the period April to June 2020, the Indian gross domestic product (GDP), a measure of economic size, was at Rs 26.9 lakh crore. This was 23.9% lower than the GDP during the period April to June 2019, which was at Rs 35.4 lakh crore. Hence, the GDP came down by a massive Rs 8.5 lakh crore.

The major reason for this was the massive contraction of 26.7% in private consumption, in comparison to April to June 2019. Over and above this, the investment in the economy contracted by 47.1%.

Given that consumption and investment are two major parts of the economy, it is hardly surprising that the economy contracted by as much as it did.

Nevertheless, as the economy opens up and people gradually go back to doing things like they always used to, the private consumption number is bound to improve gradually. The investment in the economy will also go up albeit at a much slower pace.
The reason for this lies in the fact that even before covid struck, the Indian industry had excess capacity and the capacity lying idle has gone up post covid.

This will ensure that the GDP figure for the current and the next two quarters will improve. By the time April to June 2021 comes around India will be in growth territory and that too a massive one.

The GDP during April to June 2021 is bound to be much more than the GDP during April to June 2020 (unless there is a lockdown of similar proportions). This is where things get interesting.

Let’s see what the GDP growth in April to June 2021 is likely to be at various levels of GDP in comparison to the GDP of Rs 26.9 lakh crore in April to June 2020. The chart plots various scenarios.

Up, up and away 

Source: Author calculations and National Statistics Office.

As can be seen from the above chart, the GDP growth figure is likely to be very high for the period April to June 2021.

If the GDP were to recover to Rs 30 lakh crore, the growth will be 11.5%. But in absolute terms we will still be where we were in April to June 2016, when the GDP was at Rs 29.7 lakh crore. So, we will be around five years behind.

If the GDP were to recover to Rs 31 lakh crore, the growth will be 15.2%. But in absolute terms we will still be where we were in April to June 2017, when the GDP was at Rs 31.4 lakh crore. So, we will be around four years behind.

If the GDP were to recover to Rs 32 lakh crore, the growth will be 19%.

If the GDP were to recover to Rs 33 lakh crore, the growth will be 22.7%.

If the GDP were to recover to Rs 34 lakh crore, the growth will be 26.4%. But in absolute terms we will still be where we were in April to June 2018, when the GDP was at Rs 33.6 lakh crore. So, we will be around three years behind.

If the GDP were to recover to Rs 35 lakh crore, the growth will be 30.1%. But in absolute terms we will still be where we were in April to June 2019, when the GDP was at Rs 35.4 lakh crore. So, we will be around two years behind.

In exact terms, India needs to grow by greater than 31.6% in April to June 2021 to be able to cross where we were in April to June 2019. Even in the most optimistic scenario, covid has probably cost us two years of growth.

Hence, the growth in April to June 2021 will look fantastic. And that’s simply because the GDP in April to June 2020 simply collapsed. This collapse will lead to the GDP growth April to June 2021 looking very good. And this, dear readers, is nothing but the base effect at play. Also, if the GDP figure for April to June 2020 gets revised downwards, as it is likely to be, then the growth figure will look even better.

Given this, the GDP growth numbers during 2021-2022, the next financial year, will have to be taken with a pinch of salt. The numbers from April to June 2022 onwards will tell us the real story about economic growth being back on track or not.

Of course, given that most of us do not understand basic fifth standard mathematics or simply choose to ignore it, we will buy into this massive double-digit growth story.

Yes, we did it. It’s always been more fun to believe in rhetoric than use the brain. And a year down the line in history isn’t going to change that.

The Mother Economy


Gross domestic product or GDP, is one of the most used or perhaps abused terms in economics. The trouble is that too many people use it without realising that it is ultimately a theoretical construct and not a real number.

In the simplest terms GDP is defined as the value of goods and services produced in a country during the course of a year. The trouble is in defining what has a value and what doesn’t. As the old GDP joke goes, when a man or a woman marries his or her housekeeper, the GDP of the country goes down. This happens simply because the housekeeper was paid for doing the house work. The spouse clearly won’t be.

On a serious note, this joke shows a big loophole in the way the GDP is calculated. The calculation takes only paid work into account. The trouble is that unpaid work forms a very important as well as large part of the economy, though this is something that most people do not realise.

As Kate Raworth writes in Doughnut Economics—Seven Ways to Think Like a 21st-Century Economist: “If you have never really thought of it before, then it’s time you met your inner housewife (because we all have one). She lives in the daily dealings of making breakfast, washing the dishes, tidying the house, shopping for groceries, teaching the children to walk and to share, washing clothes, caring for elderly parents, emptying the rubbish bins, collecting kids from school, helping the neighbours, making the dinner, sweeping the floor, and lending an ear.”

Most of us do these things and don’t get paid for it. Nevertheless, they are a very important part of the lives that we live.

Raworth is British and hence, invocates the term inner housewife. In India, there are real housewives (not that they are not there in Britain) who just take care of the home. As per the National Sample Survey (NSS), for women in the age of 25-54, the labour force participation rate varies between 26 to 28 per cent in urban areas and 44 per cent in rural areas. Hence, most Indian women don’t work, in the conventional sense of the term. But they run their homes. Even young girls who are not married are expected to contribute towards house work.

All this never gets counted towards the GDP. As Raworth writes: “In sub-Saharan Africa and South Asia… when the state fails to deliver, and the market is out of reach, householders have to make provisions for many more of their needs directly. Millions of women and girls spend hours walking miles each day, carrying their body weight in water, food or firewood on their heads, often with a baby strapped to their back – and all for no pay.” And given that there is no pay, the work does not reflect in the GDP.

In fact, economists have even put numbers to this unpaid work. “A 2014 survey of 15,000 mothers in the USA calculated that, if women were paid the going hourly rate for each of their roles – switching between housekeeper and daycare teacher to van driver and cleaner – then stay-at-home mums would earn around $120,000 each year. Even mothers who do head out to work each day would earn an extra $70,000 on top of their actual wages.”

This unpaid work which is a very important part of a running a household smoothly as well as bringing up a child, is not reflected in the GDP. And that is a real problem. This patriarchal attitude of economics as it is practiced, needs to be corrected in the years to come.

The column originally appeared in the Bangalore Mirror on June 9, 2017.