Key Details
The EAC-PM working paper, An Investigation into Corporate Profits and Investment, examines why improved corporate earnings have not produced a comparable expansion in physical investment. Its findings complicate the argument that companies are simply retaining profits: many firms have instead used stronger balance sheets to reduce debt, while investment decisions appear constrained by expected returns on additional capacity.
Indicator | Finding and Significance |
|---|---|
Profit growth | Aggregate profit before interest and tax grew 21.42% in FY2023–24 |
Fixed-asset growth | Gross fixed assets increased 6.10%, producing a 15.32 percentage-point gap with profit growth |
Profitability | Median return on assets rose from 4.4% in FY2020–21 to 7.2% in FY2023–24 |
Investment relative to GDP | Addition to gross fixed assets declined from 3.46% of GDP in FY2022–23 to 3.27% in FY2023–24 |
Ownership pattern | Investment recovered more consistently among Indian business-group companies; it remained subdued among standalone Indian private and foreign-owned firms |
Corporate debt | Firms representing around 82.4% of the sample’s total assets reduced their debt-equity ratios |
Manufacturing | Firms generated more revenue from their existing fixed assets, indicating improved capacity utilisation rather than a general shift to asset-light activity |
Profit Recovery Has Outpaced Capital Formation
The paper uses CMIE Prowess data for FY2008–09 to FY2023–24, covering 48,896 listed and unlisted companies. A balanced sample of 9,577 continuously reporting firms is used to check whether changes in database composition affect the results.
Corporate profits and investment both recovered after the pandemic, but at very different rates. Profit before interest and tax (PBIT) grew by more than 12% annually from FY2021–22 and by 21.42% in FY2023–24. Fixed assets grew by 6.81% in FY2022–23 and 6.10% in FY2023–24.
PBIT consequently increased from 11.19% of GDP in FY2019–20 to 15.66% in FY2023–24, while additions to gross fixed assets remained below their pre-pandemic peak.
This does not mean investment has stopped. The paper finds a cyclical pattern in corporate capital formation, with earlier peaks around FY2014–15 and FY2019–20. The pandemic coincided with the expected downswing and weakened the subsequent recovery.
The Earlier Large-Firm Investment Spike Has Not Returned
A small group of large, asset-rich firms recorded unusually high investment intensity in FY2019–20. That spike disappeared during the pandemic and has not returned.
Investment is now more broadly distributed, but without similarly large projects lifting the aggregate. The paper points to India’s limited presence in highly innovative sectors capable of producing major investment cycles, including the relative absence of “superstar firms” in generative AI and related technologies, as one possible factor.
Investment has also diverged by ownership. Indian business-group companies show a more sustained recovery; standalone Indian firms initially recovered but then plateaued, while foreign-owned firms have continued to weaken since FY2019–20.
High Profits Do Not Guarantee New Investment
The study finds that marginal profitability — the expected return on additional capital— has weakened, even as returns from existing assets have improved.
A profitable company may therefore postpone a new factory or production line if the additional capacity is unlikely to earn a sufficiently attractive return. Possible reasons include:
domestic and import competition;
excess capacity and subsidised exports overseas;
trade and regulatory uncertainty; and
technological change that could make new equipment obsolete.
What Is Marginal Profitability? It is the expected return from the next unit of capital invested, rather than the profit generated by existing assets. Current profits can therefore rise while incentives for new investment weaken.
The paper does not independently quantify these factors, so trade disruption, technology and geopolitical uncertainty remain possible explanations rather than statistically established causes.
Finance and Market Concentration Do Not Explain the Slowdown
The paper finds no significant evidence that increasing market concentration caused the investment slowdown. More than 90% of corporate assets were in sectors where competitive pressure either increased or remained broadly unchanged.
Financial constraints also appear unlikely to be the main cause. Rising profits have coincided with widespread deleveraging and stronger corporate balance sheets, unlike earlier investment slowdowns associated with stressed firms and constrained bank lending.
There is, however, a potential signal of future investment. Since FY2021–22, manufacturing firms have generated more revenue from their existing fixed assets, indicating higher capacity utilisation. If demand continues to increase, firms may eventually need another round of capital expenditure to expand capacity.
Policy Relevance
Investment incentives need to influence prospective returns. Production-linked incentives are relevant because they can improve the commercial viability of adding capacity, rather than merely increasing firms’ current earnings.
Public infrastructure can lower the cost of private expansion. Better logistics, energy and industrial infrastructure can raise the expected return on new factories and equipment and thereby crowd in corporate investment.
The composition of investment deserves attention. A recovery led mainly by established business groups may not generate sufficient technological diversification unless innovative and smaller firms can also scale.
R&D policy is part of the investment agenda. Higher research expenditure, stronger industry-academia linkages and support for technology-intensive firms could create businesses capable of driving new investment cycles.
Commercial dispute resolution affects investment certainty. Faster contract enforcement and alternative dispute-resolution mechanisms can reduce a domestic source of uncertainty when global trade and technology risks are already elevated.
The results should nevertheless be interpreted within the study’s coverage. Its company-level database excludes unincorporated businesses, partnerships, cooperatives and much of the informal economy. The paper’s fixed-asset measure also does not fully capture intellectual-property investment, meaning that total corporate capital formation is understated.
Follow the Full Working Paper Here: An Investigation into Corporate Profits and Investment, EAC-PM Working Paper No. 56/2026