The long shadow of ‘zombie firms’ on India Inc, in charts

What binds telecom major Vodafone, infrastructure company IVRCL, Bajaj Hindusthan Sugar Ltd and real estate company Unitech? For each of them, profit before interest and taxes was insufficient to cover interest payments for three consecutive years up to 2024-25. Effectively, they were either defaulting on their loans or borrowing more or raising capital to service them.

In finance parlance, such companies are called ‘zombie firms’. They keep going, but their fragility limits their own prospects and, at a broader level, those of the overall economy. A recent study by Dun and Bradstreet (D&B) shows that while their absolute numbers remain significant, their relative prevalence has declined from six years ago. Yet, it remains high enough to cast a shadow over the economy.

Debt management

This D&B study, released in September, assessed around 6,000 listed Indian companies between 2015 and 2025 on the ‘interest coverage ratio’ (ICR). Mathematically, this is the profit before interest and taxes divided by the interest payable. An ICR figure above 1 means the company has sufficient surplus to service its interest obligations; below 1 means it doesn’t. The study classified firms with an ICR below 1 for a given year as ‘stressed’ and for three straight years as a ‘zombie’.

Sufficient data was available for 81% of the 6,000 companies. During the annual period from 2017 to 2025, the share of observable firms classified as either stressed or zombie was the highest when the covid pandemic resulted in hard lockdowns—23.5% in 2020 and 22.2% in 2021. In 2025, this figure dropped to 14.2%—the lowest during the study period amid an improvement in the broader corporate environment, according to D&B.

Half recovery

There are companies that have spent several years in the stressed or zombie sets. For example, IVRCL has had an ICR below 1 since 2014-15 at least, and Unitech since 2015-16. But there are also companies, even with solid businesses, that enter this set only to exit it later. For example, telecom major Bharti Airtel had an ICR below 1 from 2018-19 to 2020-21, resulting in its classification as a zombie in 2020-21. However, it has since become healthier and pulled itself out. Conversely, its rival Vodafone has lingered there since 2018-19.

The D&B study shows that, on average, one among five listed companies acquired zombie status at least once between 2015 and 2025. In other words, it’s a common business occurrence. The larger question is what happens to them once they enter that set. Of the 971 companies that were classified as zombies in any year between 2015 and 2025, about 43% had made a full (over 1 ICR for two consecutive years) or temporary recovery (over 1 ICR for one year) in 2025. But about 25% of the set retained its zombie status in 2025, while another 10% were stressed.

Sectors in stress

Given that companies compete for common resources, it’s more efficient for an economy to see a dynamic reallocation of resources from weak firms to strong firms with high growth potential. According to the D&B study, this landscape appeared considerably healthier, although it also reflected stronger debt-servicing capacity rather than direct evidence of efficient capital allocation.

“At the same time, declining zombie prevalence does not immediately eliminate the existing stock of financial stress, as firms that enter prolonged distress can take considerably longer to recover,” it added.

There are some sectors where the incidence of zombie companies is higher, suggestive of fundamental shifts. A howindialives.com analysis of ICR of listed companies for a three-year period from 2022-23 to 2024-25 with more than ₹10 crore interest payout (translating into roughly ₹100 crore debt) shows that construction and textiles had the highest number of such firms. However, as a share of all companies in each sector, stress was more pronounced in cement, telecom and media.

Asian comparison

While the D&B report examines the share of stressed and zombie companies among listed Indian firms, a September working paper by the Bank for International Settlements (BIS), covering listed and unlisted companies across 10 prominent Asian economies from 2005 to 2021, found that India had a high prevalence of zombie firms.

Zombie firms accounted for 16% of Indian companies (second highest in this set) and 14.2% of Indian corporate assets (third highest). The BIS paper traces a significant increase in the share of zombie firms across the 10 economies—from 11% in 2008 to 17% in 2021 by number of firms and 6% to 13% by assets.

To be sure, the period and criterion used by the two papers differ slightly. Both the D&B study and the BIS paper used the same base criteria—ICR of below 1 for three straight years. However, D&B is based only on listed companies, while BIS included both listed and unlisted firms. Moreover, BIS used stricter criteria for removing the zombie tag. BIS demands three consecutive years of ICR above 1 to remove the zombie tag as against D&B that requires two years.

Next-order effects

The BIS paper identified “evergreening practices by weak banks” as a key reason for this asymmetry across the Asian economies. In simpler words, instead of writing off a loan, let’s say of ₹100 crore, a weakly capitalized bank lends the company another ₹10 crore to service the loan and keeps it going.
A similar observation was made by a 2022 Reserve Bank of India (RBI) study, which looked at Indian companies from 2000-01 to 2019-20. It noted that zombie firms, on average, were generating a negative return on assets. Yet, they had a higher debt burden, were more leveraged, and were paying more on their loans. According to the study, “they borrow more to survive than undertake new investment."

This trend has implications for the economy at large. Tracing their trickle-down effects, the BIS paper noted that zombie prevalence domestically depresses firm performance, crowds out healthy companies, and depresses inflation and GDP growth. It estimated that the lingering presence of zombies, and the resultant inefficient capital allocation, dampens growth and inflation by about 0.2 percentage points per year.

www.howindialives.com is a database and search engine for public data