In the first six months of the current fiscal, while growth in agriculture, at 3.6%, was much higher than the level reached in H1 last year, the services sector, at 6.3%, grew slower than last year (7.7%).
But the poor growth of industry (1.3% compared to 1.5% last year) continues unabated, resulting in concerns for the commodity sector. In construction, much slower growth in finished steel consumption vis-a-vis cement production in Q2 has further brought down the steel-cement ratio. This apart, the poor growth in mining is entirely policy related as there is no contraction in demand. What is most worrying is the poor growth in industry, especially in manufacturing, which is demand-related. Data indicate a slow reversal of the sector's ill fortunes, but a large component of a healthy growth projection for the industry is linked to investment.
Gross fixed capital formation as a percentage of the GDP at market price has dropped to 29% in the current H1, a distinct fall of 1.4 percentage points from H1 of last year and way below the 32.9% clocked in 2007-08.The anticipated uncertainty in the investment scenario (discussed last week) has much to contribute to the slowdown in the industry's growth. This is also reflected in the low manufacturing PMI of 49.6 for October 2013. Traditionally, there is a lull in industrial activity in the fortnight prior to the Budget. The entry tax imposed by various states has affected the inter-state movement of goods and is gradually turning into a major controversial issue. With a strong likelihood of a soft Budget (having minimal changes in direct and indirect taxes), and a consensus on GST still far-fetched, the industry has to wait for other factors to boost demand. To contain the fiscal deficit, the finance ministry has announced cuts in the budgetary provisions for different departments, which may hurt the government's consumption and expenditures for Q4. Keeping in view ensuing elections, this years Budget may boost social expenditures at the expense of industrial investment.
To what extent private investments (which have been dwindling as a percentage of the GDP), can make up the shortfall would depend on a variety of factors, including political stability in the post-election period. With agriculture growing at 4% (good kharif output in Q2 and Q3), the services sector expanding at 7% and industry achieving a minimum growth rate of 1.5%, it is possible to reach 5.2% GDP growth in 2013-14. This implies the industry will grow 1.7% in H2 on the back of rising output from cement, coal, steel, refining and other sectors.
The author is DG, Institute of Steel Growth and Development. The views expressed are personal .