Economic slowdown: What will impact demand and exports, find out here

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December 31, 2019 7:30 AM

Continuing with the premise that liquidity issues have afflicted Indian economy and therefore the regular production trend of the commodity sector, a few more data by the Reserve Bank of India (RBI) have come to light.

The gross non-performing assets (GNPAs) in the economy has maintained an unchanged ratio of 9.3% during March and September, and is slated to move up to 9.9% of the total advances by September 2020.

Continuing with the premise that liquidity issues have afflicted Indian economy and therefore the regular production trend of the commodity sector, a few more data by the Reserve Bank of India (RBI) have come to light.

Total credit growth by scheduled commercial banks (public and private) has gone up 8.7% in September, slower than 13.2% growth observed in gross loans and advances in March. It is important to note that the credit growth by public sector banks (PSBs) has, in fact, gone down by 4.8% (y-o-y) in September, and the growth in credit by the entire banking sector has been made possible by 16.5% credit growth by other private sector banks. This raises the question if the PSBs have become more risk averse compared to their private counterparts in the recent period.

The gross non-performing assets (GNPAs) in the economy has maintained an unchanged ratio of 9.3% during March and September, and is slated to move up to 9.9% of the total advances by September 2020. It is reported by the RBI that the asset quality of the sectors measured by the GNPA ratio stands at 6.3% in the services sector, 10.1% in the agriculture sector and 17.3% in the industrial sector. However, it may be mentioned that in March and September, the annual slippages in all sectors have come down. The slippage ratio has, in fact, increased in segments like textile, rubber and plastic, and construction, and by a lesser extent in segments like infrastructure, basic metals and mining.

The deterioration in asset quality in construction as well as infrastructure sectors has adversely affected the credit growth in these sectors, which continue to remain the highest category accounting for nearly 68% of steel consumption growth. In addition, the GNPAs from non-banking financial centres (NBFCs) have gone up from 6.1% in March to 6.3% in September. This has impacted credit flows to the SME sector, which accounts for nearly 47% of domestic steel availability.

The lowering of the growth rate in NPAs may not, however, conclusively point to a revival of market sentiment as the risk surveys conducted by the RBI do indicate that perceptions on fiscal risk, corporate sector risk and banks’ asset quality risk have marginally moved up in April and October. The risk survey has also signalled that resolution of legacy-bad assets, under the Insolvency and Bankruptcy Code, have proved to be essential to enable banks to support the current aspirations to economic growth in the country.

At this stage, it must be mentioned that global risk elements, specifically with regard to economic growth (global GDP for 2019 currently projected at 3.0% as compared to 3.2% projected in April by IMF), global trade growth currently estimated to grow by 1.1% in 2019 as opposed to 2.5% envisaged earlier do indicate that global growth and trade are the two important parameters determining export growth.

The total merchandise exports from India have exhibited de-growth of 2% in April to November against 10.9% rise last year. However, in case of the steel sector, despite the rising concern over continuation of trade wars between China and the US that has adversely impacted steel exports from the export-oriented countries/blocks, viz. Japan, EU, Russia, South Korea and Turkey, India has emerged as a net steel exporter during April-November period.

While total imports during the period stood at 5.35 MT by the end of November showing a decline of 11.8% (0.72 MT lower compared to last year), the total steel exports at 7.51 MT indicating a rise of 28.0% (1.64 MT more compared to last year) shows that India has become a net exporter by 2.16 MT by the end of November. If the current growth rate in exports and imports are maintained in the next four months, India would end FY-20 by being a net exporter with 3.24 MT of steel.

Indian steel producers must continue to make maximum efforts in raising exports to countries like Vietnam, the UAE, Italy, Belgium, Nepal, and of products like HRC, coated sheets, CRC, plates, wire rods, billets etc.

Higher exports would enable higher capacity-utilisation as well as higher realisation in tune with increasing global prices (Chinese export price of HRC SS 400 fob Ex-Tianjin at $483/t in December rising from $ 427/t in October).

It is argued that while poor growth in credit from the SCBs is dominated by the Gross NPAs reflected in their balance sheets, it is also influenced by the strength of demand for credit. The RBI survey shows that large corporate houses, being liquidity-rich, have limited credit needs and as this sector has a major share in investment, the adverse impact on reviving investment is established. However the missing link is the demand growth in the economy, which would pave the way for investment from the corporate sector. Also, public investment infrastructure is to take care of the larger risks of return even at the cost of a few more per cent of GDP and it must precede the flow of investment by corporate in real estate, consumer durables, logistics and capital goods sectors.

(The author is DG, Institute of Steel Development & Growth. Views expressed are personal)

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