From all available indications, it appears that the industrial production index would continue its slow and steady growth journey with the manufacturing sector back on rails since March onwards. The percentage growth may appear satisfactory calculated on the low base of the previous year
Measurement of growth in percentage terms always gives interesting picture. As the demand has been somewhat subdued in the last few months and raw material availability is yet to be fully ensured, a 7.1% real consumption uptick in steel in April this year appears not in tune with market realities. But even assuming that steel consumption in April last year was poor (low base) so that this year’s growth looks respectable, it is heartening to note that the manufacturing sector has begun to look up (manufacturing grew by 5.2% in February, 2015). The sustainability of this growth rate in the subsequent months remains a challenge for the industry as infrastructure investment is yet to commence in full swing although utmost efforts are being made by the government to create an enabling environment.
The production growth in mini and other producers (including induction furnace) of as high as 14.3% in FY15 against only 2.7% growth in ISP production and overall production growth of 8% in crude steel during the period points out to another similar example of jugglery in percentage growth measures. Sponge iron production, despite facing a huge problem of scarcity of iron ore as well as availability at a competitive price, has clocked a minimum growth of 2.5% with operating margin exceeding 11% in the last year against loss in FY14. Thus percentage growth over a low base in the previous period conceals more than it reveals about the real health of the industry.
The increasing depreciation of rupee is making imports dearer and the volatility in the rupee exchange rate is making the hedging cost high. These two factors along with 2.5% import duty on Ferro Nickel, Pure Nickel and 5% import duty on Ferro Molybdenum, the major inputs required for the production of stainless steel, make their landed costs higher and this cannot be neutralised by drop in the international prices of these raw inputs. The case for withdrawal of basic customs duty on these inputs as well as on melting scrap (2.5%) and SS scrap (2.5%) and on Met Coke (recently imposed) is strong on two grounds. First there is hardly any indigenous availability of these items except in Met Coke and secondly, it would be a good relief to the languishing SS industry and small and medium players in the steel industry.
From all available indications it appears that industrial production index would continue its slow and steady growth journey with manufacturing sector back on rails since March this year onwards. The percentage growth may appear satisfactory calculated on the low base of the previous year. However, positive growth in the index plays a major role in boosting the business sentiments on order placed, inventory accumulation, working capital and capex planning, export orders booked and similar other indicators.
The sustenance of this positive outlook crucially depends on continuation of the growth journey shown by monthly movement of the index. This way, IIP and manufacturing index stand a good chance of indicating a respectable percentage growth in the coming months as the growth in earlier months of the previous year was subdued for a long stretch.
To derive real insights into the authenticity and sustainability of growth paradigm, a simple moving average analysis (compared to monthly average) may be better. But if the enabling factors are taken care of with sincere efforts and required policy interventions by the government, a positive monthly index still stands a chance of generating hope and fuelling aspirations.
The author is DG, Institute of Steel Growth and Development. Views expressed are personal.