1. Place much higher emphasis on investment in building infrastructure

Place much higher emphasis on investment in building infrastructure

A few questions frequently discussed in many forums specifically in the last one year relate to steel intensity of many economic indicators with which some commodities are supposed to be correlated. It is perceived and rightly so that as these macro indicators move upwards they would push up the growth of a slew of commodities […]

By: | Updated: August 2, 2016 7:46 AM
Between 2005-06 and 2015-16, while the shares of primary sector (agriculture, fishing) in GDP has dropped from 19.5% to 15.4% (Reuters) Between 2005-06 and 2015-16, while the shares of primary sector (agriculture, fishing) in GDP has dropped from 19.5% to 15.4% (Reuters)

A few questions frequently discussed in many forums specifically in the last one year relate to steel intensity of many economic indicators with which some commodities are supposed to be correlated. It is perceived and rightly so that as these macro indicators move upwards they would push up the growth of a slew of commodities like steel that has been traditionally linked inseparably with the growth and progress of the economy. It is, however, easy to conclude that if the country’s GDP is contributed more by sectors that either do not or barely use steel then surely steel has a lesser role to play in the country’s progress. For a longer time series, say, during 1992-93 to 2013-14, steel had a GDP elasticity of 1.1. In the last few years during 2008-09 to 2013-14, the elasticity has come down to 0.72.

Between 2005-06 and 2015-16, while the shares of primary sector (agriculture, fishing) in GDP has dropped from 19.5% to 15.4%, the share by the tertiary sector ( transport, communication, public services, banks, trade and financial services, hotels) has gone up from 52% to 54%. The share of secondary sector (mining, manufacturing, construction, electricity, gas and water supply), mostly steel-intensive, has been nearly stagnant at 26.5-30%, significantly lower than service sector share. This mostly explains the lack of demand pushing factors for the steel industry in the recent period.

In the initial stage of our planning era, the emphasis on heavy industry-led growth that the country adopted based on the Soviet model of development had to give way to fill up the gap arising in agriculture and service sectors from 4th Five-Year Plan onwards. It is said that the paradigm shift in the commodity-fetish development of Indian economy has created more wealth and consequently rise in per capita income, but it also resulted in increasing the unemployment rate, the regional imbalances, the inflation rates and a stagnant growth in exports.

Without going into the debate of suitable path of development of our country, it is worth mentioning that for the spectacular growth of steel industry in China, the single factor identified to have explained the revolutionary change in the fortunes of steel industry in that country is the rise in steel-intensive share of investment in infrastructure and construction sectors that reportedly accounted for 7 times more of steel use compared to investment in other sectors. On an overall basis the elasticity of steel with capital formation in India has risen from 0.8 in the long term series (1992-93 to 2010-11) to 1.04 during the later period (2008-09 to 2013-14). The share of Gross Capital Formation in GDP has marginally increased from 24.3% in 2000-01 to 29.3% in 2015-16. This also explains the relative loss of dominance of the steel industry in the development process of the country.

There is a third explanation. The faster growth of the steel industry is much dependent on whether the GDP growth is investment or consumption led. In China the share of capital formation in GDP has steadily jumped from 33% in 2000 to 48% in 2015 with corresponding decline in consumption share. It has a direct impact on raising the annual average growth rate of steel consumption to 11.9% during the period. In case of India, only 5.0% rise in share of investment during 2000-01 to 2015-16 restricted the annual average growth in steel consumption at 7.4% during this period. Also volume wise the level of steel consumption in China that was 4.5 times higher compared to India in 2000 rose to 8.4 times in 2015.
This broad analysis conclusively brings home the point that unless India’s growth process places a much higher emphasis on investment in building infrastructure and construction of real estates, transport, oil and gas network, irrigation, waterways and making India a manufacturing hub of commodity-based segments like automobile, defence equipment, machinery and engineering and fabrication industry and more reliance on export potentials, it would be difficult to envisage a market wide enough to consume a large component of the planned capacity augmentation by the domestic players in the steel industry. It is heartening that the flagship programmes announced by the government — Make in India, Smart Cities, Clean India, Houses for All — are likely to open up immense possibilities to enhance application and use of steel for sustainable and enduring development of the country.

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

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