The shifting pattern of economic growth in India with a near stagnant growth in industry is not conducive to the growth of the commodity sector.
When lockdown arising from the need of social distancing became an essential component of our fight against Covid-19 pandemic, we were seized with the uncertainty of commencement of some economic activities that would at least fulfil the gap between what the user segments desire and what support can be provided to enhance the supply. We no longer talked of GDP growth like RBI has done in its last MPC. Thus, the latest notification on GDP growth in FY20 (4.2% against 6.1% in Fy19) issued by CSO did generate a pleasant surprise as the economy showed resilience in achieving this level of growth under the current scenario.
It is, however, admitted that the estimates may be revised when the full data is made available later. Further, it is believed that full impact of the pandemic in the form of prolonged lockdown and consequent closure of economic activities hampering both industrial and service sectors would be captured in the National Accounts Data for Q1 and Q2 in FY21.
We have earlier seen that around 15-20 days’ closure of economic activities has robbed the manufacturing sector, forcing to drop in March by around 21% and taking IIP to a new low of (-) 16.7%. The fall in manufacturing in March was accentuated by corresponding drop in output of capital goods segment ( 35.6% de-growth), Infrastructure and construction segment ( 23.8% de-growth) and consumer durable segment ( 33.1% negative growth).The second advance estimates of CSO has put GDP (at constant prices) growth in Q4 of FY20 falling to 3.1% compared to Q4 of last year.
However, GDP growth in FY20 plummeted each quarter from 5.2% in Q1, 4.4% in Q2 and 4.1% in Q3. Despite this declining trend, a few positives are worth mentioning. Agriculture, forestry and fishing sector in GVA is up 5.9% in Q4 as compared to 3.0% in Q1. As a result, this sector has clocked a growth rate of 4.0% in FY20 as opposed to only 2.6% in FY19. As WPI for food has also shown 8.4% growth in FY20, it should imply that at least a part of it has contributed to growth in rural income (considering the asymmetrical relationship between rise in WPI in food with growth in rural income). Secondly, the mining and quarrying sector GVA has grown by 5.2% in Q4, the highest in all quarters.
The yearly growth of 3.1% in FY20 is way above the negative growth clocked by this sector in last year. The mining output in FY20 rose by 1.7%. The recent policy guidelines have opened coal mining for commercial purposes, done away with captive mining process, introduced lease transferability, incentivised exploration of mines, encouraged coal gasification programmes to reduce dependence on fossil fuel.
Electricity, water supply and other utility services sector GVA grew by a healthy rate of 4.5% in Q4 and 4.1% in FY20. The GVA in public administration, defence and other services sector achieved a high growth of 10.1% in Q4 and correspondingly 10.0% for the full year. For defence procurement, the government has enhanced the FDI limit through the automatic route from 49% to 74% to help global players to set up manufacturing facilities within the country and thereby supplement the domestic manufacturing capabilities.
Indian economy is consumption-led as 68.5% of GDP is composed by private consumption (57.2% of GDP, growing at 5.3% in FY20) and government consumption (11.3% of GDP, growing at 11.8% compared to 10.1% last year). As government consumption includes net purchase of commodities and services and consumption of fixed capital, it also contributes to demand for steel, cement and all other commodities. Nearly 30% of GDP is contributed by GFCF, which is a proxy for investment.
More than the public investment, it is investment by the corporate sector and household investments that have been declining in the past years. It is seen that per capita income at current prices has grown by 6.1% in FY20 against 9.7% growth in the last year. The income generation has been affected adversely by lower growth in manufacturing sector, which is labour intensive.
The shifting pattern of economic growth in India with a near stagnant growth in industry is not conducive to the growth of the commodity sector. India’s rich mineral resources can be most effectively utilised by the higher growth in steel sector. Thus more demand for steel needs to be encouraged for a speedy development of the mining sector. During FY12 to FY20, while share of agriculture in GVA has fallen from 18.5% to 14.6%, the service sector has enhanced its share from 49% to 55.2% with industry’s share remaining stagnant or coming down( from 32.5% in FY12 to 30.2% in FY20).
It is observed that steel intensity in Infra investment in India is much lower compared to what is happening in China, South Korea and Japan. The revised National Investment Pipeline report has indicated around Rs 80-lakh crore investment in core infra sector during 2020-25. This investment is to made by the centre, state governments and thrust would be on PPP mode in project execution to attract private investment and FDI.