Unemployment rises but profits also grow, making investment unlikely

While unemployment is growing, so are corporate profits, which are unreasonably high. And as demand falls, their unutilised capacity also grows, making more investment unlikely. This is the grim picture that the data reveal.

With the Centre for Monitoring Indian Economy (CMIE) placing the unemployment rate at 8.1%, highest in the last two years, alarm bells have started ringing again. Indeed the CMIE Home Page does not carry much cheer on consumer sentiment or investor sentiment either.

The headlines on the website tell their own story: Why companies are unlikely to invest anytime soon; Low skill jobs dominate; Real wages fall and of course the PMI Index, indicating the health of the manufacturing sector, also fell to a two-year low in October.

But the CMIE had also reported that a good monsoon and agricultural activities had boosted consumer sentiment in the rural areas, where people are still hopeful for the future. This could explain the ruling party’s continued good run in elections. But then this sentiment was reported before Diwali and the CMIE report towards the end of November will throw more light on what is happening.

Mahesh Vyas, the respected MD and CEO at CMIE, significantly, provides an explanation as to why the stock market continues to boom and corporate profits continue to soar.

“The Indian corporate sector does not need to make investments for a few years to remain profitable and even see profits and profitability grow. As a result, investors can expect a free ride of sustained profits growth over the next few years. It would be great if demand picks up. But, in the short to medium term, that may not be a serious constraint. Profits could continue to grow even handsomely because of the government’s generosities…,” writes Vyas.

While Vyas does take note of the Reserve Bank of India’s Consumer Confidence Survey, which has been recording a persistent fall in consumer confidence since March 2019, he believes the situation is not as stark as the RBI maintains.

While the RBI has produced consumer confidence indices in May, July and September and each has shown a fall, cumulatively declining by well over 10 per cent since March 2019—and he acknowledges that these are sharp declines—CMIE’s own surveys seem to suggest some silver linings in the rural areas.

But on investment by corporate India, he is not as hopeful. With profits growing, companies have no incentive to invest or reduce prices or pass on the reduction in corporate taxes to the consumers. Vyas writes, “So, what could spur investments? An elementary answer to that would be, when investments made in the past are well utilised. So, are assets underutilised today? The answer to that is a clear Yes. If a unit of asset generates less sales today than it did in the past then, compared to the past, assets are under utilised today. This is clearly true of the non-finance companies.”