India’s growth story is engaging the attention of all the major analytic and evaluating agencies like World Bank, IMF, ADB and of almost all the group of rating agencies and media. The centrepiece of discussion borders on the high growth of GDP being experienced by India in the past one decade and the forecasts made available for the next years. The back up GDP series released recently by the government indicates GDP growth of 5.2% in 2011-12 growing to 7.1% in 2016-17, 6.7% in 2017-18 and projected to be in the range of 7.3-7.4% in next 2 years, as per IMF forecasts. Thus, if GDP growth continues to remain a prime indicator of the wellness and development of a country’s economy, India scores high in the ranking. However, there is an imperative need to sustain the growth rate of GDP at a high level and even higher to 8-10%, the other fundamentals of a growing economy must also support the growth agenda.
The recently released strategy paper by Niti Aayog does not specify specific GDP numbers to be attained in the next few years, rather kept it within a band but adequately draws attention to the various challenges that the country would be facing if it attempts to sustain the past GDP growth rates and even endeavour to exceed those in the coming years. Out of the different aspects raised by it, that play significant role in sustaining a secular growth rate of GDP in the country, the investment scenario and growth of manufacturing sector have been particularly earmarked. The importance of these two factors in shaping the growth trajectory of Indian economy has been frequently stated in this column.
Gross Fixed Capital Formation as a percentage of GDP moved up to 34.3% in 2011-12 and subsequently fell to 30.1% in 2014-15, 28.5% in 2015-16 and stayed there for the next 3 years. In Q2 of FY19 the ratio moved up to 29.2% of GDP. It has been stated in the document that this rate should reach the level of 36% of GDP, a clear jump of 7% of GDP in order to pull up the GDP figure. As the ratio had earlier touched more than 34% of GDP, a push by another 2% is not an impossible task. In terms of absolute figure, 34.3% of GDCF/GDP ratio in FY12 translates to `29,977.33 billion worth of investment. In FY18 it has been of the order of `47,788.94 billion, a `17,811.61 billion rise in 6 years.
Also, according to the traditional analysis, a GDP growth of 7.1% in FY18 with GDCF as percentage of GDP at 28.5% yields a capital output ratio (ICOR) at 4.01%. By raising the GDCF ratio to 36%, the same ICOR would take GDP growth to a magical figure of 9%. As regards investment in infrastructure, the paper highlights importance of investment in creation of physical infrastructure. In China, the corresponding figure currently is 41.2% which went up to 48.0% in 2011 and has since come down to this level in the aftermath of economic reforms that encouraged consumption in place of fresh investment, an indicator of a developed economy. However, China is yet to discard the path of stimulus measures to spruce up the falling rate of GDP and manages to maintain the GDCF/GDP ratio at 41%.
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The second caveat relates to share of manufacturing sector to reach 25% of GDP from the current share of 18.2% in Q2 of FY19. In the recent months, the rate of growth of manufacturing sector has moved up and in October 2018 it has reached 7.9% growth rate. While manufacturing of vehicles, machinery and equipment, other transport and furniture are showing signs of good growth, manufacturing of electrical equipment is slow. Exports of engineering goods are to grow at a much higher rate to supplement the growing requirements of MNCs opening offices and processing centres in India.
The above two factors are critical for growth of the commodity sector and especially steel. Steel-GDP elasticity has weakened over the years as GDCF/GDP ratio has declined and manufacturing share has also not been increasing. An analysis on the behaviour of these two variables would establish conclusively the positive correlation which implies that any improvement in GDCF/GDP ratio would pull up the demand from manufacturing sector. The near stagnant GDCF/GDP component in the last three financial years has coincided with no improvement in share of manufacturing in GDP.
During April-November 2018, steel consumption in the country has grown by 8.4% duly supported by finished steel production growth of 4.5% and much lower decline in imports compared to exports. Relative improvement in investment scenario compared to the previous year resulted in a respectable growth of 9.3% in consumption of Bars and Rods and 5.5% in case of Structural and 4.8% more consumption of Plates. The crude steel production at 96.9MT by India during the first 11 months of the calendar year 2018 has enabled India to occupy the second position in global steel production, although the press release by WSA mentions crude steel production of all other major countries and region except India.
(The author is DG, Institute of Steel Growth and Development. Views expressed are personal)