Two Faces of the Demand Problem (Part‎ 1)

I. Mountains of Cash

India’s large capitalists and India’s people are both facing problems at present. These problems appear to be direct opposites of each other; but in fact they are two faces of the same phenomenon.

In the first part of this article, we describe the financial situation of the corporate sector. In the second part, we describe the financial situation of the people. In conclusion, we link the two.

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India’s private corporate sector is sitting on mountains of idle cash. At the same time, banks too are sitting on mountains of cash, and are unable to find borrowers among large industry. Given that private corporations are not interested in putting even their own cash to productive uses, they are naturally not interested to borrow from the banks toward such ends.

In one sense, the present situation is a remarkable turnaround. Nearly a decade ago, the Government’s Economic Survey 2015-16 attributed the economic slowdown – which by then was about five years old – to what it called the “twin balance sheet problem”, i.e. the balance sheets of the corporate sector and the banks.

Firstly, according to the Survey, corporate profits were low while debts were rising, forcing firms to cut investment to preserve cashflow. Secondly, it said, banks’ bad loans had been rising since 2010, and therefore banks held back on lending, so as to conserve their capital. “By now,” said the Survey, “it is clear that the TBS [twin balance sheet] problem is the major impediment to private investment, and thereby to a full recovery.” That is, according to the Survey, the problem was of the supply of funds for investment.

On the basis of this understanding, the Government spent the next decade trying to boost corporate profits – trying, as it were, to massage the corporate sector into investing. Corporate profits indeed grew handsomely, and firms were able to wipe out much of their debt. Meanwhile banks used their own profits to clean up the bad loans on the books (with the Government also contributing some funds as equity). Both balance sheet problems, of the corporate sector and the banks, were thus cleared up.

Had the TBS theory been correct, the corporate sector’s productive investment should now have gone up, and bank loans to the corporate sector for such investment should have risen too. But instead, the corporate sector has simply built up cash hoards, and refused to step up productive investment. Even the post-Covid profit surge failed to stimulate corporate investment. As a result, banks don’t have enough corporate borrowers. The new twin problem is a surfeit of funds with both firms and banks; and the investment slump continues as before. Why has this happened?

Real problem: lack of demand

In fact the problem was never the lack of funds as such to deploy for investment; the problem was the overall lack of demand in the economy such as might induce private capital to invest. When firms are optimistic about the prospects for growth, they plough their profits back into expanding productive capacity, in order to make yet larger profits. If, on the other hand, they are pessimistic about growth prospects, they can either distribute the cash as dividends to shareholders, or hang on to the cash, and deploy it in financial activities and speculation. At present, India’s private corporate firms are engaged in these latter two options (i.e., distributing dividends and hanging on to cash). While corporate chieftains routinely tell the business press that they see sunny days ahead, their actual refusal to invest in productive activities reveals that they don’t anticipate demand growing anytime soon. That is a comment on the condition of the people.

For example, Mint looked at the finances of 285 listed non-financial firms, and found that they were sitting on cash holdings of over Rs 5 lakh crore at the end of 2024-25 (1 lakh crore = 1 trillion). Despite these riches, the private corporate sector’s announcements of new projects fell 5 per cent in 2024-25, on top of a fall of 3 per cent in the previous year.¹ “With no broad-based revival in demand since the pandemic, there’s no incentive to reinvest profits”, remarks Mint.²

While demand has remained sluggish and investment has stalled, corporate profits have nevertheless taken off in the last five years. The RBI notes that despite the decline in sales growth of non-financial corporates during the last two years, “their operating profit margin remained solid”.³ RBI data for these firms show that their net profits raced at a compound annual growth rate (CAGR) of 17 per cent between 2020-21 and 2024-25, more than three times the rate of the preceding five years. The ratio of net profits to sales soared (see Chart 1).

And so the firms’ pockets are bulging with cash. RBI data show that the cash buffers (i.e., cash and assets which can easily be converted into cash) of listed private non-financial firms are large and rising – more than 29 per cent of total liabilities in 2024-25.⁴ Thus, even without borrowing from the banks, the corporate sector could greatly increase its investment. But it shows no sign of doing so.

Tax cut bonanza

The cash buffers were already sizeable in 2019-20, but they started an upward climb thereafter. One reason for the rise was the steep cut in corporate tax rates announced in September 2019.⁵ At the time, the corporate media celebrated this, claiming the tax cut would revive the economy. The headlines read: “Nirmala Sitharaman slashes corporate tax to fire up economy, market responds with a massive surge,” “Govt. cuts corporate tax to spur investment, jobs,”and so on.

The tax cut was indeed a huge bonanza for the corporate sector. An analysis by the Hindu found that the effective tax rate for the top 500 firms on the Bombay Stock Exchange fell from nearly 34 per cent in 2018-19 to 21 per cent in 2023-24. (For the top 10 per cent of these firms, the rates fell even lower.) The Hindu conservatively estimated that the BSE-500 firms saved over Rs 3 lakh crore in the period by 2024 as a result of the tax cut.⁶

Inevitably, the corporate sector now contributes a smaller share of total tax revenues. A separate analysis by the Hindu found that the share of corporate tax in the gross tax revenues of the Centre fell after the tax cut from almost 32 per cent in 2018-19 to 25 per cent in 2024-25. Meanwhile the share of GST in tax revenues stayed constant and the share of personal income tax rose.⁷

The corporate sector’s profits rose steeply as a share of GDP in this period. A Motilal Oswal study found that the profits of the Nifty-500, as a percentage of GDP, more than doubled between 2019-20 and 2023-24. Their profits grew at more than three times the compound annual growth rate of GDP.⁸ That is, the corporate sector was taking a bigger and bigger share of the national income.

“The corporate sector has never had it so good”

No doubt the 2019 tax cut was only one of the contributors to corporate profit growth. Other contributors to profit growth included the reduction in their interest costs, and their grabbing of market share from small firms. At any rate, as the Chief Economic Advisor (CEA) V. Anantha Nageswaran noted, “In terms of financial performance, the corporate sector has never had it so good.”⁹

However, the corporate sector’s tax bonanza and its soaring profits did not spur investment by them or “fire up the economy”. The RBI’s latest study shows that the private corporate sector’s investment plans fell by over 9 per cent in 2024-25 over the previous year.¹⁰ Moreover, as the Chief Economic Advisor noted last year, private corporate productive investment has remained sluggish, and instead the corporate sector has been ploughing money into real estate – “not a healthy mix.”¹¹ The Finance Minister has gone to embarrassing lengths, pleading with corporate chieftains to invest:

I would equally want to know from the Indian industry why they are hesitant (to invest)…. We will do everything to get the industry to invest here..(but) I want to hear from India Inc what’s stopping you? Is it like Hanuman? You don’t believe in your own capacity, in your own strength and there got to be someone standing next to you and say you are Hanuman, do it?

Despite being told that they, like Hanuman, should believe in their own strength and “do it”, the corporate chieftains have preferred not to do it, but to hang on to their cash. So flush with cash, indeed, is the private corporate sector that the BSE 500 firms handed out Rs 4.9 lakh crore in dividends to shareholders in 2024-25.¹² A Businessline editorial notes that just India’s big four tech firms have handed Rs 6.2 lakh crore back to shareholders in the past decade; meanwhile they made capital investments of just Rs 90,000 crore over the same period. “Shareholder payouts have clearly taken priority over seeding businesses to drive future growth.”¹³

The biggest shareholders are generally the promoters of these firms. Business Standard carries a list of some of the biggest recipients of dividends in 2024-25 – the Nadars of HCL Tech (Rs 9,906 crore), Anil Agarwal of Vedanta (Rs 9,589 crore), Azim Premji of Wipro (Rs 4,570 crore), Mukesh Ambani of Reliance Industries (Rs 3,805 crore), and so on.¹⁴ Whether through the promoters or through other shareholders, much of this distributed money may find its way back into the stock market, real estate, or other unproductive speculation, rather than into productive activity.

Surplus liquidity in the banking system heading toward Rs 5 trillion

To repeat: Since the private corporate sector is uninterested in investing, it needs much less bank credit. Thus banks have lost what used to be their biggest borrowers. At the end of March 2014, large industry accounted for almost 35 per cent of outstanding non-food bank credit; by the end of March 2025, that figure had collapsed to just over 15 per cent (Chart 3 below).

Over Rs 4 lakh crore of surplus liquidity is sloshing around in the banking system, since corporate borrowers are staying away.¹ Despite this existing surfeit, the Reserve Bank of India (RBI) has been lowering interest rates and lowering the Cash Reserve Ratio (the share of deposits banks must compulsorily place in interest-free deposits with the RBI). All this is supposed to revive corporate investment. Thus by November-December even larger volumes of liquidity, an estimated Rs 5 lakh crore, will be sloshing around the banking system, with no takers.

The growth of bank credit is slowing in all three sectors of production: agriculture, industry, and services. The growth of credit to industry (small, medium and large) has slowed to 6 per cent year-on-year in July 2025. Within this, the growth of credit to large industry is less than 1 per cent, or a fall in real terms (i.e., after discounting for inflation).¹⁵

The growth of personal loans, too, has come down in 2024-25. However, this is not on account of reduced demand for such loans, but due to measures put in place by the RBI in November 2023 to restrict the runaway growth of such loans (the ascending line in Chart 3 above). We turn to this question in the next part.

1. Data of the Centre for Monitoring the Indian Economy. ↩︎
2. Abhinaba Saha, “India Inc sits on Rs 5 trillion cash pile as firms hold back on capex amid uncertainty”, Mint, July 6, 2025. Similar articles appeared shortly thereafter in other publications: Swaraj Singh Dhanjal, “India Inc’s cash pile growing twice as fast as its debt,” Moneycontrol, July 8, 2025, and Kishor Kadam and Viveat Susan Pinto, “India Inc cash reserves double as balance sheets get leaner”, Financial Express, July 13, 2025. ↩︎
3. RBI, Financial Stability Report, June 2025, p. 31. ↩︎
4. Cash Buffer is defined as Cash/Total Liabilities x 100, wherein Cash = ‘cash and cash equivalents’, ‘short term loans and advances’ and ‘current investments’; and Total liabilities = Sum of ‘total long-term borrowings’ and ‘total current liabilities’ less ‘short-term provisions’. RBI, Financial Stability Report, June 2025. ↩︎
5. The rates were slashed from 30 per cent to 22 per cent for existing firms, and from 25 per cent to 15 per cent for new firms. The earlier tax rate was 25 per cent for firms with a turnover of up to Rs 400 crore, and 30 per cent for firms with a higher turnover. The rate was reduced to 22 per cent if firms if the firms decided to forgo certain deductions, and even lower for new manufacturing companies. ↩︎
6. These firms also saved another Rs 8 lakh crore on account of tax deductions in the period since 2013. ↩︎
7. Nitika Francis, Vignesh Radhakrishnan, Samreen Wani, and Sambavi Parthasarathy, “Union Budget 2025: Income tax’s share in gross collections expected to rise, despite change in tax slabs”, Hindu, February 1, 2025. ↩︎
8. Motilal Oswal Financial Services India Strategy, “Corporate profit to GDP – Rebounds to a 15-year high!”, June 10, 2024. Thus, between 2018-19 (before the tax reduction) and 2023-24, GDP rose 56 per cent in nominal terms (i.e., without discounting for inflation), but profits of the Nifty-500 firms rose 178 per cent. ↩︎
9. Economic Survey 2023-24, p. ix. ↩︎
10. Snigdha Yogindran, Sukti Khandekar, Rajesh B Kavediya and Aloke Ghosh, “Private Corporate Investment: Growth in 2024-25 and Outlook for 2025-26”, RBI Bulletin, August 2025. ↩︎
11. Economic Survey 2023-24, p. ix. ↩︎
12. Abhinaba Saha, op. cit. ↩︎
13. “TCS, Infosys, HCL Tech and Wipro: Employee downsizing in recent years has its roots in excessive focus on shareholder returns”, Editorial, Businessline, July 27, 2025. ↩︎
14. Krishna Kant, “Nadar family tops promoter dividend income list in FY25”, Business Standard, July 12, 2025. ↩︎
15. Anjali Kumari, “Banking system liquidity surplus reaches Rs 4.09 trillion amid govt spending”, Business Standard, August 4, 2025. ↩︎