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  1. Macro economic data reassuring, but a few concerns stay

Macro economic data reassuring, but a few concerns stay

The construction sector, which accounts for nearly 62% of the total steel consumption in the country, has grown by only 2.3% (at constant prices) in H1 as opposed to 3.7% in H1 of last year.

By: | Published: December 5, 2017 4:28 AM
Macro economic data,  fiscal year, indian economy, gdp growth The construction sector, which accounts for nearly 62% of the total steel consumption in the country, has grown by only 2.3% (at constant prices) in H1 as opposed to 3.7% in H1 of last year.

Macro-economic data for the second quarter of the current fiscal has assured that the Indian economy can achieve around 6.5% GDP growth in 2017-18. The assurance has been strengthened by the increased PMI for manufacturing reaching 52.6 in November 2017 compared with 50.3 in the previous month and the enhanced growth rate of industrial production at 3.8% in September 2017. As the total tax revenue less subsidies are added to GVA to arrive at GDP figures and as filing of GST return for Q2 goes beyond September, it is likely that final GDP growth for the second quarter would exceed 6.3%. There are, however, a few concerns for the industry.

First, the share of GFCF as a percentage of GDP is down from 27.5% in Q1 to 26.4% in Q2. The growth rate in GFCF in H1 in the current year over the last year at 4.7% is marginally higher than growth of last year’s H1. The share of government consumption at 13.5% is lower than that in Q2 of the previous year, with private consumption expenditure keeping 57.3% share of GDP and the Indian economy continues to be consumption driven. Second, the construction sector, which accounts for nearly 62% of the total steel consumption in the country, has grown by only 2.3% (at constant prices) in H1 as opposed to 3.7% growth in H1 of last year. Also, the share of construction in GDP has come down by 0.2% in H1 of the current year compared with the last year. The status of the global construction sector, according to the latest Mckinsey report, is significantly poorer than the growth rates of manufacturing and the global economy. It is seen that the Indian construction sector ($ 0.2 trillion) suffers from poor labour productivity compared with other major steel producing countries like China, the US, Japan, Korea, Russia and Turkey. Of the three components of the construction sector, namely real estate (residential and commercial), social infrastructure (schools, hospitals, stadiums) and civil infrastructure (transportation, power, water, telecom), India is projected to exhibit good growth in real estate segment boosted by rising incomes, emerging middle class, rapid urbanisation and the success of the affordable housing programme of the government. Further, the role of government spending is likely to be a major determinant of growth of civil infrastructure like in the US. It is also important to focus on designs and engineering processes and reskilling of the workforce in the construction sector to raise productivity.

Third, the manufacturing sector, accounting for around 38% of steel consumption in the country, has grown by 7% in Q2, much higher than the rate in Q1, but falls short of the growth rate in Q2 of last year. Meanwhile the Global Forum on Steel Excess Capacity has been formed with 33 major steel producers (including India) accounting for around 90% of world steel production and capacity and OECD acting as the facilitator of the forum. It would compile and share detailed data on country-wise capacity building, market-distorting trade practices, subsidies and deliver the collective solutions by fostering a truly level playing field. Recognising the regional variations in growth of steel consumption, the forum agrees with WSA that secular decline in steel intensity due to visible shift towards more effective use of steel requiring low weight high-performance steel, ageing population and digitisation trends would lead to a long-term growth of only 1% in global demand for steel. Applying this rate to global steel consumption in 2015 (1616.8 mt) as reported by WSA and the world steelmaking capacity derived by OECD at 2369.5 mt, the global surplus capacity is estimated to have reached around 737 mt in 2016. China, being the target of contributing maximum to the scourge of global excess capacity and the consequent damaging impact on the stability, profitability and sustainability of global steel industry, has a major role to play in the global forum. It has already announced capacity reduction of 100-150 mt of steel making capacity during 2016-20 and is well on the way of fulfilling this target. To rehabilitate the estimated unemployed workers of 5, 00,000 numbers in the steel and coal sectors due to capacity reduction, a special fund of RMB 100 billion has been created. Taking a cue from the steps taken or proposed to be taken by all other countries, the forum has compiled measures to facilitate restructuring, redeployment, provision of retraining services to retrenched employees in the aftermath of closing down of steel capacities. For countries like India, Indonesia, Saudi Arabia and South Africa, plant modernisation and product specialisation have been mentioned so that emerging capacities do not crowd already existing capacities. The initiatives indicated in our NSP 2017 have been referred to. In the policy prescription, the primary focus is towards enhancing market functions in terms of refraining from market-distorting subsidies and government support measures and fostering a level playing field and ensuring transparency in implementation of policy measures among the member countries of the forum. Between 2014 and 2016, while global capacity has dropped by 43.7 mt, India has enhanced capacity by 16.5 mt. During this period, India has contributed around 29% to global new capacity creation of 82 mt. A total of 137 mt of steel capacities has been closed in the global market in the last three years.

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