Even the hardened critic of India’s economic growth would agree that all the major economic parameters of the country are showing reasonably good signals.
GDP growth at 7.4% is one of the highest in the world; inflation measured by Consumer Price Index is contained at around 5.5-6%. The current account deficit stands at 1.2% of GDP and is therefore manageable. The foreign exchange reserves at $351 billion is comfortable with exchange rate nearly stable per dollar at Rs 66-67. The RBI has reduced the repo rate to 6.75% with the objective of bringing down the cost of capital, although the rate is still considered high to promote investment.
Despite these positive developments, two factors are causing roadblocks to sustain the journey to a good growth path. First, there is a lack of investment to translate the positives into sustainable realities. It is seen that Gross Fixed Capital Formation as a percentage of GDP (proxy for investment) has steadily come down from 33.6% in FY12 to 28.3% in Q2 FY16. Notably the component of private corporate investment has seen a steep fall to less than 9% in FY15. And secondly, the country is taking steps to ease the various restraints of doing business in India, but the procedural complexities and the clearances of different departments that are required prior to setting up of a business entity in India are still considered enormous and too many.
The sharp decline in commodity prices, particularly oil, metals and minerals, have contributed to bringing down the inflation and CAD and partially helped raise the forex reserves. The same factor, however, has negatively hurt the bottom lines of a host of units in these sectors and as manufacturing has a strong multiplier impact on both upstream and downstream units, the declining commodity prices have adversely affected a much wider component of related industries.
The downswing in the profitability indices of a large part of the manufacturing sector is also responsible for decline in private corporate investment as the rate of return on investment and the pay-off period of investment are not favourable. That brings us to the question of hedging the business risk of investment. The government is trying to make the PPP mode of investment more attractive by issuing guidelines that would facilitate this type of investment by the corporate sector in railways, roads, defence equipment manufacturing, urban infrastructure building to name a few.
As regards the steel industry, the demand from various end using segments is subdued. One of the major factors responsible for the mess is lack of adequate investment in the finished products, be it in energy, construction and manufacturing, processing and consumer durable segments. The increased public investment in some of these areas could have crowded in corporate investment by minimising the associated risks. Another factor that is crucially significant for the steel sector is the declining steel intensity in growth in value addition in GDP and manufacturing. This implies that the growth rates in manufacturing may not reflect the commensurate growth in steel consumption.
As per the new series of GDP (2011-12 bases), the steel intensity in manufacturing has come down from 4.79 in FY12 to 4.33 in FY15. The nearly 10% drop in the index implies that growth in manufacturing sector need not necessarily translate into the growth of the steel industry. Rightly so steel consumption has grown at an annual average rate of only 2.7% between FY12 to FY15.
In the manufacturing sector nearly 30% of the sub segments comprising basic metals, fabricated metal products, machinery and equipment, electrical machinery, motor vehicles, other transport equipment and furniture manufacturing may be grouped under steel-intensive segments. These segments have contributed not more than 58% of 10.6% growth achieved by the manufacturing sector in October 2015. The steel intensity in manufacturing sector therefore needs to rise significantly to boost up the growth in the ailing steel sector.
The author is DG, Institute of Steel Growth and Development. Views expressed are personal.