Indian economy commenced FY18 with a slower growth rate of 5.6% in GVA and 5.7% in GDP in Q1 against 7.9% growth in first quarter of last year. It is not surprising as value additions by the corporate sector during the quarter was below average as reported by Crisil and industrial production, that grew by a meager 2% in Q1, pulled down the growth rate.
Generally, it is believed that uncertainity surrounding the full impact of GST slowed down the output and inventory depletion activities. Accordingly, slower IIP growth for Q1 was primarily contributed by 1.8% growth in manufacturing (80% weightage) and 1.3% growth in the mining sector (14.4% weightage).
Capital goods sector continued the fluctuating run by clocking a negative growth of 4% in the quarter with consumer durables also witnessing 0.9% negative growth. It is interesting to note that steel industry that has been grouped under intermediate (semis) and infrastructure and construction sub-sectors, according to the new base of 2011-12 for industrial production, have witnessed a positive growth of 1.4% and 1.9%, respectively, during the quarter.
Although the business sentiments are encouraging, the Gross Fixed Capital Formation (GFCF) as a percentage of GDP reached 29.8% in constant prices in Q1 of FY18 (29.5% in FY17) which is a distinct fall from 31% achieved in Q1 of FY17.
The annual report of RBI for FY17 has highlighted the steady improvement in inflation management. The WPI for FY17 moved up by 1.7% over last year and went up marginally to 1.88% at the end of July 2017.
While primary product prices have gone up by 0.46%, the manufactured prices have moved up by 2.18%. The report has indicated that only 0.7% of GDP growth of 7.1% in FY17 was contributed by GFCF, net exports accounted for 0.4% and the balance by consumption expenditure. The aggregate demand suffered on account of a sharp slowdown in GCF. The positives are comfortable Current Account Deficit (CAD) as CAD/GDP ratio comes down from 4.8% in FY13 to 0.7% by FY17. The non-food credit is likely to grow at 4.8% in the current year, a drop from 8.4% in FY17 with negative growths projected for non-food credit for basic metals, power, roads and telecommunication sectors.
Interestingly, there has been a growth in Foreign Direct Investment from $18,286 million in FY13 to $36,317 million in FY17, a growth of 99% in 4 years and this would supplement the domestic investment.
What this economic scenario has in store for the steel industry? Crude steel production at 33.01 MT in first 4 months has gone up by 3.8% and India is shortly catching up with Japan to become the second-largest steel producer in the world. Finished steel consumption in the period at 27.91 MT has moved up by 4.4%. WSA has projected a growth of Indian steel consumption of 6.1% at 88.62 MT in 2017 and 7.1% at 94.91 MT in 2018, one of the highest growing among the global steel producers.
India has become the net steel exporter having exported 2.81 MT in April-July 2017 and imported 2.51 MT of steel. The prices of finished steel in the last 10 months have on an average gone up by 18-21% and made a positive impact on the profitability position of steel industry.
The laggard in this positive scenario is the poor pace of private corporate investment that has experienced a secular decline from 29.2% of GDP in 2011-12 to 23.9% in 2016-17. With Bharat Mala, Sagar Mala, DFC, industrial corridors, ports, civil aviation, metro rails, urban infrastructure, water and sewerage pipelines and others, the public investment well supplemented by World Bank, ADB funding have made positive contributions.
Traditionally, private investment (household and corporate) is strong in real estate, roads and highways, commercial complexes, storage and warehouses, metals and manufacturing, among others. The stressed assets in steel being one of the highest in the NPAs of PSU and other financial institutions have made the lending agencies wary of extending further credits to the private corporate sector in a big way unless the health of the industry becomes robust with pick up of demand from infrastructure, construction and manufacturing. Auto sector demand is stable, affordable housing is commencing in a big way, port-led development (Sagar mala), roads, railways and rural houses are making headways. Steel industry is on the threshold of a big push.
(Views expressed are personal)