Sushim Banerjee
Last week we discussed that not only GDP growth but GDP composition impacts steel consumption as well. The near stagnant share of secondary and manufacturing sectors is what pulls down steel consumption growth in India.
There is also a widely-held perception that although the steel-GDP inter-relationship provides a long-term elasticity factor (based on the past series) that is used for projecting future demand for steel, there exists an inflexion point in the GDP growth chart that explains the yearly fluctuating relationship between steel consumption and GDP growth. If GDP growth exceeds this threshold, steel consumption growth would be higher due to higher GDP elasticity and if GDP falls below the level, steel consumption would drop down at a much higher rate. This hypothesis owes its origin to another theory of relationship of steel consumption with growth of per capita income of a country with a threshold limit of $1000 which had many exceptions and is not being talked much.
Historically some examples can be cited. In 1993-94 GDP grew by 5.7%, respectable growth by the so-called Hindu standard, steel consumption was a mere 1.9%. That year the construction sector miserably failed at 0.6% which must have pulled down steel demand, considering the predominance of construction in India’s economic growth in the early 90s. GDP growth in 1993-94 was contributed by 7.4% growth in the tertiary sector. Next year being the watershed year for steel, it experienced a hefty 21.3% growth against 6.4% growth in GDP. Manufacturing went up by as high as 10.8% and boosted steel demand. However, enhanced steel availability from emerging private sector steel plants had a positive impact on steel consumption.
It may be noted that the secondary sector went up by 9.2% in that particular year. In 1996-97, the country witnessed 8% growth, but steel consumption went up by a meagre 4.1% as construction sector grew disastrously at 1.9%. In 1998-99 the GDP growth of 6.7% was accompanied by only 3.8% growth in steel consumption because manufacturing had dropped to 3.1% and secondary sector to 4.1%. This year GDP growth was primarily led by 8.3% growth in the tertiary sector. In 2002-03 growth of GDP at 3.9% saw steel consumption grow by more than double the rate at 7.6%, pushed up by manufacturing and construction at 6.9% and 8.3%, respectively. The following year saw both GDP and steel consumption growing at 8% with construction reaching 12.4% growth.
The golden run of the economy during 2005-06 to 2010-11 witnessed manufacturing sustaining an average growth of 10.3%, construction sector growing at an average of 8.6%, yielding 8.8% average growth for the secondary sector. In the last two years, a sharp fall in GDP was caused by significant fall in industrial output with manufacturing turning negative and construction barely reaching the positive growth zone. An average growth of around 7% in the tertiary sector could not prevent the significant drop in GDP.
Summarising, projecting steel demand exclusively on the basis of long-term GDP elasticity needs to be moderated with suitable caveats on GDP composition and the role played by manufacturing and construction, ably supported by investment and positive industrial growth. It is not advisable to determine ad hoc the point of inflexion in GDP growth rate that would trigger off demand for steel, particularly in a country that has not exactly pursued the standard mode of economic development in the past decades.
The author is DG, Institute of Steel Growth and Development. The views expressed are personal
Source: The Financial Express
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