The Asian Development Outlook 2017 Update, published recently by ADB, has estimated GDP growth for India at 7% in 2017 (0.4% lower than April projection) and at 7.4% in 2018 (0.2% lower). Barring Bangladesh, Myanmar and Cambodia, the projected GDP growth of India is still the highest in developing Asia, which includes Japan, South Korea and China.
The estimates for India exceed that of China by 0.3% in the current year and by 1% in 2018. There are a few observations in the report on the different economic management process of the two countries that have an important bearing on the development of steel industry.
First, total private consumption contributed 3.6% to GDP growth in Q1 of FY18 in India, while contribution from investment was 2.9% and in China the growth was also consumption led, accounting for 4.4% GDP growth, while investment contributed 2.3% and net exports around 0.2%.
Second, it is observed that import elasticity of GDP growth in developing Asia during 2011-16 is very high and investment has an average import content of 30%. Data reveal that public infrastructure programmes in India, Philippines, Korea, Malaysia and Indonesia have led to sharp rise in imports. This phenomenon may also be true for rising steel imports to India in the recent months.
All mega investment projects in Sagarmala, Bharatmala, Smart Cities, Metro Rails, DFC, Bullet Train etc, have an import content which is sometimes linked with the FDI and aid associated with the projects. This issue needs an in-depth analysis of the emerging demand component that would not be available to the domestic steel manufacturers and would be met from imports in the coming years.
Despite problems in the property market, the floor space of new construction projects in China grew 7.6% in the first 8 months of the current year. The Belt and Road initiative of China involving 68 countries for Silk Road Economic Belt and Maritime Silk Road is slated to generate 150 mt of steel demand by next decade, comprising 80% structures and reinforced concrete with 20% demand for machinery and equipments.
Third, Chinese domestic demand has moved beyond low-cost products towards more sophisticated consumer goods suitable for a growing middle class and thus China would no longer be the major producer and exporter of low-cost manufactured goods. Accordingly, the heavy industries in China faced unemployment, which was taken care of by creation of 7.4 million new urban jobs that resulted in increased wages.
Fourth, corporate debt to GDP ratio reached 166% in China in 2016 compared to 73% in USA, 94% in Japan and 104% in EU. Around 60% of corporate debt in China is owned by SOEs, which have forged a special relationship with state-owned banks and local governments. It is heartening to note that RBI in India has adopted a slew of strong measures to bring down the growing NPAs of the steel firms in order to facilitate the credit flow to the steel industry for working capital needs and capacity augmentation programmes. The non-food credit growth in India has slowed down with private corporate sector preferring overseas funds, institutional borrowing, housing finance companies and mutual funds.
Fifth, it has been estimated that Asia needs $26 trillion for infrastructure investment during 2016-30, or $1.7 trillion investment per annum. This is against an average annual $881 billion investment in infrastructure in Asia in the past years. The gap between infrastructure needs and current investment is widening over the years and if aging and degradation of existing infrastructure is taken into account, the gap comes to more than 5% of GDP in Asia (excluding China).
Sixth, PPP transactions in China and India comprise a remarkably high proportion of around 90% of the total investment in East and South Asia. The characteristics of PPP investment centre on private sourcing in debt and equity, public sources and development banks and institutions. India is following Hybrid Annuity Model for PPP projects.
However cancelled PPP projects continue to be a problem area. China has received PPP proposals mostly in energy (50%) followed by water supply and sanitation (34%), while India has received maximum PPP proposals in transport sector. It is needless to mention that the steel intensity of investment in energy and water transportation is much higher than in road sector.
The ADB report also highlights the low share of electrical and electronic equipments in manufacturing exports of India compared to many neighbouring countries. The thrust on ‘Make in India’ initiative should bridge this gap.
The author is DG, Institute of Steel Growth and Development.