Indias manufacturing growth will test steel industrys mettle

Written by Sushim Banerjee | Sushim Banerjee | Updated: Apr 16 2014, 09:29am hrs
According to IMF's global economic outlook, the world recovery is gaining strength bolstered by the financial stability of the advanced economies, while the growth process is slow in emerging and developing economies. The downward risks that these economies would encounter, India being the foremost among them, relate to monetary tightening to controlling inflation and inflationary expectations and structural reforms with regard to investment, taxes, subsidies and product pricing. Curiously, the advanced countries have been advised to take measures to avoid deflationary trends that some of them (US, Germany, France, Japan) are facing. Indias growth which plummeted to 4.4% in 2013 has been projected to grow to 5.4% in 2014 and to 6.4% in 2015. For China, it is a soft landing of GDP coming down from 7.7% in 2013 to 7.5% in 2014 and to 7.3% in 2015. The IMF has appreciated Indias efforts to bring down the CAD to 2% of GDP in 2013.

The findings of the report for the Indian economy, therefore, brings into focus the dichotomy between monetary tightening and economic growth, well backed up by investment and a reasonable industrial growth, especially in the manufacturing sector. If the RBI rightly claims that by raising the real interest rate, inflation has been brought down, the responsibility of a sharp drop in GDP from 9.3% in 2010-11 to 4.7% in Q3 in FY14 cannot be left to only policy logjam stalling innumerable projects and inability of all the states to agree on a uniform Goods and Service tax. A large part of the overall uncertainty and lack of confidence among the buyers, entrepreneurs, suppliers and all other business stakeholders had their roots in the secular decline of GDP, which still remains one of the best indicators of the health of the economy. It would be the litmus test for the new government to find out innovative steps and means to put an end to the uncertain business confidence so that the health of the manufacturing sector is retrieved, entrepreneurial zeal for fresh investment is generated thereby leading to the growth in GDP.

The short-range outlook for steel consumption by WSA has projected finished steel consumption in the country to grow by only 3.3 % at 76.2 MT in 2014, which is better than the paltry growth of 1.8% in 2013 and envisaged a 4.5% growth in steel consumption in 2015.Official figures show that India consumed around 73.9 MT of finished steel in FY14 at a mere 0.6% growth over the previous year.

On a long-term basis, steel consumption is correlated with GDP growth. However in the short term there may be a disconnect between the two and this became prominent in FY14 itself. WSA feels that in 2014 when Indian economy is set to grow by more that 5%, steel consumption would still lag behind at 4.5%.

This implies that GDP composition would be dominated by non-steel intensive sectors. However, if manufacturing sector contributes to the growth of the economy as has been projected by many experts, a higher rate of growth in steel consumption is possible.

The author is DG, Institute of Steel Growth and Development. The views expressed are personal