Steel sector plays bigger role in boosting business sentiments – here’s how

Published: July 3, 2019 3:14:46 AM

The purchasing managers’ index (PMI) which focuses on business sentiment for Indian manufacturing sector has been of the order of 51.8 and 52.7 in April and May 2019.

Steel sector, business sentiments, growth parameters, economy, economy newsIn addition, Confederation of Indian Industry (CII) conducts a periodic manufacturing sector survey to evaluate the business trends.

Sushim Banerjee

We have been talking on business sentiments being a primary influencing factor in driving growth parameters of the economy. A country where this index is positive as indicated by higher expectations of order generation to generate revenue flows, the downward trend of inventory accumulation, larger credit flows to the industry and also for working capital, the cost and availability of raw materials, the export orders and import scenario, etc.

The purchasing managers’ index (PMI) which focuses on business sentiment for Indian manufacturing sector has been of the order of 51.8 and 52.7 in April and May 2019. We are also aware that RBI conducts a periodic Industrial Outlook Survey prior to the announcement of quarterly monetary policy to capture the business mood of a selected group of listed companies. In addition, Confederation of Indian Industry (CII) conducts a periodic manufacturing sector survey to evaluate the business trends.

As investment has a longer time horizon, preferably for six months to 1 year before the prospects of rate of return on investment become clear, it is essential to put a much higher emphasis and weightage on the anticipated scenario six months and 1 year hence.

The kind of business sentiment we are talking here that can provide a fair idea on what percentage growth in capital expenditure the private corporate sector is going to incur for say, new technology infusion, productivity improvement and for capacity augmentation. A true trend of business activity that the country is going to witness in coming quarters should thus be a part of each survey.

It can be safely concluded shrinking or stagnant share of private corporate sector investment in total investment of the economy implies that business sentiments are uncertain as yet to influence the growth uptick of the economy. It is also imperative that the concerns and challenges faced by the MSME sector are given due importance.

A look at the trend of investment as a share of GDP (current prices) in the past few quarters indicated gross fixed capital formation (GFCF) has moved up to 30.2% in Q3 of FY19 before falling to 27.9% in Q4. Higher doses of public investment have been happening in infrastructure sector in roads, railways, ports, airports, urban and rural infrastructure.

In each of these areas, there was a distinct move by the government to attract private investment by redefining PPP modes of sharing the risks of investment. With the subsidy schemes (credit-linked subsidy scheme of affordable housing) and introduction of the revised RERA in housing sector, it is likely that private investment in real estate (residential segment) would get a boost. It is imperative that public investment in all these areas must continue unabated despite the apprehension expressed in some quarters of limited fiscal space available. It has also been empirically proved that public investment in improving roads and other infrastructural support contribute immensely to the development of peripheral areas in terms of new enterprises in manufacturing and service sectors, income and employment generation.

Another aspect of encouraging private investment pertains to credit growth. Easy credit is necessary to pay for working capital needs as well as to take care of investment, provided the cost of capital is manageable. It is seen that non-food credit over the last two years has increased 24%, of which credit flow to micro, small and medium enterprises, holding 17% of total credit flow to industry, has risen by a much lesser amount. In respect of personal loans for consumer durables, the flow of credit has come down sharply in the past two years by 65% which is indicative of liquidity issues affecting the demand in this sector and drying up of the resources for working capital needs in the sector.

For vehicle sector loans, the other risks of emergence of electric vehicle (EV) and conformance to B-VI norms have aggravated the crisis. For housing, including priority sector housing (EWS and LIG), the credit flows during the last two years have risen 37% from Rs 8,588 crore to Rs 1,1769 crore.

As steel demand is influenced by growth in consumer durables and vehicle segments, the subdued credit flows to these sectors has hampered steel demand. The housing sector that is boosted by more non-food credit flows would also add to steel demand, provided the construction is steel-intensive.

For high-rise buildings (commercial and residential), the cost effectiveness of steel concrete composite technology has been established both on account of direct cost and life-cycle cost by taking into factors like faster construction, reuse of steel, less maintenance, less disturbance to neighbourhood, earth quake resistance due to ductility of steel, high resale value.

An appropriate monetisation of all these elements would also make steel-based construction the ideal technology for low-rise buildings. Lastly, it is necessary to organise awareness campaigns to propagate the advantages and cost effectiveness of steel concrete composite technology for the beneficiaries of government subsidies as well as other stakeholders for making dwelling units under affordable housing schemes. Steel industry, thus, has a much larger role to play in lifting up business sentiments.

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

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