Higher steel exports to give momentum to production

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Published: October 8, 2019 12:46:28 AM

The manufacturing PMI for India for September 2019 at 51.4, though exceeding contraction scenario, is no improvement over previous month.

For all the export oriented steel makers, the current scenario has hit the manufacturing sector, including capital goods and therefore less demand for imports.For all the export oriented steel makers, the current scenario has hit the manufacturing sector, including capital goods and therefore less demand for imports.

RBI, in its latest monetary policy review, has reduced repo rate by another 25 basis points to 5.15%. This is a continuous effort made by the central bank to cut down repo rate by 110 basis points in February-August 2019 (85 basis points reduction in April-August 2019). The impact of reduced rate on cutting down cost of capital and thereby boosting investment is to be seen with a time lag. GFCF in Q1 of FY20 is marginally lower at 29.7% as compared to 30% in Q1 of FY19. However, the necessary conditions for achieving a higher volume of investment involve reduction in actual lending rate by the commercial banks, adequate liquidity flow for the commercial sector and corresponding improvement in business scenario in terms of demand (internal and export), lowering of inventories, higher capacity utilisation and augmentation in capacity creation. The inter-connectivity in all these economic parameters is contingent on improvement of business outlook. In this respect, the regular survey conducted by RBI has indicated a lower spread between raw material costs and finished product prices in Q3.

The manufacturing PMI for India for September 2019 at 51.4, though exceeding contraction scenario, is no improvement over previous month. Manufacturing sector, however, is having a poor run in all major industrialised countries like Italy, South Korea, Japan, Germany, Spain, France, Indonesia, Singapore and Russia. In each of these countries, the operating conditions deteriorated with adverse impact on new order booking. Further, the unresolved Brexit issue and aggravation of US-China trade disputes have enhanced uncertainty in the global merchant trade.

For all the export oriented steel makers, the current scenario has hit the manufacturing sector, including capital goods and therefore less demand for imports. The US manufacturing, however, in September 2019 has experienced an improvement in production, employment and higher capacity utilisation in steel from76.4% to 77.1%.

Thus, basically it is the suppressed growth trend in manufacturing sector in major steel producing countries that is pulling down the related sectoral growth in steel demand. It has led to specific stimulus measures by accelerated public investment in infrastructure sector which would in turn require steel and steel fabricated products. India’s story is a little different. Thanks to the unique approach of the government, a few mega schemes in roadways, railways, ports, civil aviation, irrigation, piped water supply and sanitation are majorly dependent on public investment as most of them have externalities and the initial project risks need to be addressed. The limited space for funding resources without deviating from the fiscal consolidation target of managing inflation within 4% by FY20 and containing fiscal deficit at 3.3% of GDP has been mostly addressed by steep reduction in the corporate taxes to release approximately Rs 1.45 lakh crore that can boost the near stagnant private corporate investment.

The Centre has also assured that the current government consumption would continue at 12.4% of GDP. This assurance was necessary as many times in the past the same was curtailed in the name of cutting down fiscal deficit. The real estates, roadways, ports and airport construction provide opportunities for investment by private sector, including the household for accelerating activities. A lower corporate tax rate for the new firms to commence operations by 31st March 2023 is an added benefit that would prompt major steel players to create/ delink mining or downstream facilities from the core business.

As regards estimates for GDP outlook for the current year, RBI has put it at 6.1% which is the result of 5.3% growth in Q2, 6.6% in Q3 and 7.2% in Q4. These progressively rising estimates are based on the current trend and the likely impact of policy interventions. If the economic factors mentioned earlier continue to behave in an accelerated manner which is quite likely as the lagged outcome of some of the positives, the GDP growth would exceed the projected one. As the stressed assets of the MSME sector has been given a special treatment and more liquidity flows to this sector is going to be a reality from Q3 onwards, the additional boost in demand revival is certain.

It is seen from JPC reports that finished steel exports from India during the first 6 months have reached 3.9 MT at a growth rate of 21.8% over same period of last year. Finished steel imports at 4.0 MT have grown at the rate of 0.4%. For September 2019 alone, the steel exports went up by a whopping 73% compared to August 2019. This is the appropriate strategy by steel players when steel consumption in the domestic market in the first 6 months at 51 MT has grown at 5% compared to previous year.

The positives for growth in Q2 is that by end of Q1 of FY20, CAD stands at $14.3 billion at 2% of GDP, net FDI was $13.9 billion, net FII was $6.3 billion as against outflow a year ago and FE Reserve up by $14.3 billion.

As Q2 is just over; we look forward to Q3 figures with a renewed hope. Higher GFCF ratio is likely to impact GDP growth positively.

(The author is DG, Institute for steel development and growth. Views are personal)

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