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More investments in infra may help steel industry grow

The Indian economy in July-September quarter has performed comparatively worse than Q1.

By: | Published: December 4, 2014 1:55 AM

The Indian economy in July-September quarter has performed comparatively worse than Q1. But let us look at the positives.The mining sector grew by 1.9%, lower than Q1, but much higher than zero growth in Q2 of last year. The electricity, gas and water supply sectors had experienced a growth of 8.7% which is higher than previous year, but lower than last quarter. The construction sector also grew at a higher rate than last year. The maximum growth was experienced by community, social and personal services sector, which even exceeds last quarter’s level. GDP growth in Q2 exceeds both the quarters’ rates of last year.

As steel intensity in electricity, gas and water supply and construction is higher than other sectors, it may be concluded that steel consumption growth by 0.5% during H1 of the current fiscal is the outcome of this positive growth.

One significant factor constraining steel consumption relates to poor performance in manufacturing whose value addition to GDP was lower by R3,011 crore in  Q2 over Q1. The current state of manufacturing in the  country is directly linked with consistently downward trend in Gross Fixed Capital Formation at current prices whose share in GDP at market prices has dropped from 29.9% in Q2 of last year to 28.3% in the second quarter of this fiscal.

It is also seen that both private final consumption expenditure and government final consumption expenditure at current prices as a percentage of GDP at market prices have dropped in Q2 compared to Q1. As no mega investment has taken place other than the ongoing projects, a large part of them belongs to steel plants’ brownfield expansion. But one must sound a note of caution if one believes that brownfield expansion would continue unhindered in Q3 and Q4 also. The weak link in this regard is assurance of supply of coking coal and iron ore. No fresh investment is planned for Iron ore sourcing other than beneficiation, pellet plants which do not enhance availability, only facilitate quality supply.

Slurry pipelines from port to plant is another area of investment which would facilitate movement of cheaper iron ore from abroad and reduce freight cost.  But it would not enhance domestic supply. Investment in coking coal is likely to be withheld for another 3-4 months to coincide  with finalisation of e-auctioning and allotment of coal blocks.

Another major area of concern is the dwindling interest in power plants. The IPPs are too eager to get out of the market but the buyers’ interests are not there. If the situation continues, the thermal coal linkages from the new allotted coal mines by priority allocation would lose its charm.

This situation calls for remedial measures urgently as there is a big gap between demand and supply of power and the persistence of poor availability would affect the health of other manufacturing segments.

The best bet for steel industry is therefore investment in infrastructure, both public as well as investment via PPP route. Investment in real estate is growing, thanks to changes made in state building laws. The winter session of Parliament may pave the way for enhancing FDI limit in insurance sector and defence, MM&DR and land acquisition. These facilitators would significantly increase steel-intensive investment.

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

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