Industrial production for FY19 was below the expectations. At 3.6% growth rate it was lower than last year’s 4.4%.
Industrial production for FY19 was below the expectations. At 3.6% growth rate it was lower than last year’s 4.4%. It is interesting to look at the trend of production by the major components of IIP. The manufacturing sector with 77.6% weightage has grown by 3.5% in the last year which can be compared with 4.6% in FY18.
The mining sector, one of the labour intensive sectors, with 14.4% weightage in IIP has achieved a growth of 2.9%, higher than 2.3% last year. The delays associated with the fresh auctioning of mines, the intervention by the courts in capping mining production at Karnataka and Odisha have led to curtailment of mining output. This sector is eagerly waiting for the extension of the mining leases.
As the fresh exploration of iron ore mines would take time, the delay in the notification on lease extension beyond March would hamper the mining output in FY20 also. The electricity generation with 7.99% weightage in IIP has grown by 5.2% which is lower than 5.4% in the last year. There is a dip in the output of power projects and problems of thermal coal supply to the new projects have often been cited as one of the issues plaguing the power industry. Further, from the environment point of view, there is a distinct trend to use renewable energy including solar energy and search for alternate technology to reduce coal consumption.
From the use based classification of IIP, the annual data throw additional lights. The infrastructure and construction sector with 12.34% weightage rose by 7.5% in FY19, surpassing the earlier growth rates of 5.6% in last year. It consists of all steel materials, steel structures, steel frame for towers and ACSR conductors. The demand for TMT bar, plates and structural, rails, pipes is driven by the growth of this segment.
However, the flow of investment in this segment, primarily by the government and partially by the corporate and household sectors is the critical determinant of the demand growth. The capital goods industry with 8.22% weightage and comprising of pressure vessels, boilers, power equipment, generators, transformers, cranes, drums and barrels and furnaces, has ended up with a growth of 2.8%. This may be compared with 4% growth in last year. The capital goods sector being most steel intensive has a major role to play in driving the demand for steel. In a way, the demand for various components, engineering items under capital goods is very much linked with the demand emanating from infrastructure and construction sector.
The demand for capital goods is closely linked with demand for plates, HRS, rounds, structural and pipes. The consumer durable segment with 12.84% weightage primarily caters to the requirements of the household segment. The popular items in the category are ACs, washing machines, refrigerators, meters, watches, passenger cars, air coolers, pumps, auto components, 2 wheelers, bicycles, axle and steel furniture. The consumer durable segment had achieved a growth rate of 5.3% in FY19 which is pitted against the growth rate of 10.6% in the last year. A large part of demand for consumer durable segment is determined by the personal loans extended by the financial institutions to the urban and rural households. During the most part of FY19, the market rate of interest ruled high and only in the last two quarters the repo rate by RBI was brought down by 50 basis points.
However, the actual impact of market rate of interest was negligible and this has partially affected the demand for household appliances during the year. The slow growth in consumer durable segment has impacted the demand for CRC, coated products, stainless steel. The intermediate goods segment consisting of pre fabricated concrete blocks, semi finished steel, pipes/tubes, fasteners with 17.22% weightage has grown by (-)0.6% in FY19.
Manufacturing sector consists of, inter alia, a number of steel intensive segments which had a subdued growth in FY19. The manufacture of fabricated metals with 2.65% weightage has grown by (-)1.4% in FY19 against 2.3% in last year. The demand for structural, plates and rounds is accounted by this segment. The manufacturing of machinery and equipment has achieved 2.4% growth in the fiscal year and can be compared with 5.6% growth in last year.
This demand, which caters to the export of engineering goods also is linked with consumption of alloy, SS, rounds, plates, coated products. The manufacture of motor vessels and trailers had an impressive growth of 7.2% in FY19, albeit lower than 12.6% growth achieved in last year.
It is known that auto sector in H2 of FY19 has a declining growth rate due to poor demand from the household sector, the anticipated competition from electric vehicles and need to comply with rigid carbon emission norm. The manufacture of other transport equipment (rails, ships, barges) had grown by 8.8% during the year, lower than 14% growth of last year. The manufacture of electrical equipment driving the demand for electrical steel sheets has grown by 2.4% against (-)12.4% downturn in last year.
(The author is DG, Institute of Steel Growth and Development. Views expressed are personal)