Another significant feature of the GDP growth in FY15 has been the declining share of fixed investment as a percentage of GDP, which has come down from 33.6% in FY12 to 29.8% in FY15. This factor alone has pulled down the steel demand trend
GDP growth in FY15 as per the revised series at 7.4% is satisfying. The initial disbelief among the learned experts, including some of the government agencies on the sudden hike in growth figures has to await an elaboration by CSO on the appropriateness of the methodology followed and the subsequent revision of the past series. It is a nice feeling although that our economy was performing at a higher level than what our official data have made us believe so long and the same has at least impacted all the current forecasts on Indian economy. For FY16 the RBI predicts GDP to grow at 7.8% followed by IMF forecast of 7.5%. The forecasts put India’s growth story exceeding China in the short and medium term.
As industrial production data are still based on 2004-05 series, the figures in IIP may not match the movement of growth parameters revealed by the new GDP series. And here lies a major problem of comparing these two sets of data prepared on different bases and calculation of economic indicators on different parameters like value added method and market prices.
It is a common practice of correlating behaviour of an industrial sector with GDP growth. For instance, while the economy has grown by more than 7% in FY15, consumption of steel has moved up by a meager 3.0%. This is much lower than GDP-elasticity of steel consumption calculated at 1.1 based on past series.
There are two aspects to this phenomenon. First, growth in GDP currently is being primarily contributed by service sectors with industrial sector remaining stagnant or showing poor growth. As per estimates based on the new series, service sector and industry are to clock 11% and 5.6% growth respectively in the last year. The second explanation cites a hypothesis often quoted by some analysts that growth in GDP by less than 5% would trigger a higher fall in steel demand and if GDP is pushed up beyond 5% (elasticity more than 1), steel demand growth would be higher than this. The recent data have falsified this hypothesis and the reasons can be elaborated partially as above.
Another significant feature of GDP growth in FY15 has been the declining share of fixed investment as a percentage of GDP that has come down from 33.6% in FY12 to 29.8% in FY15. This factor alone has pulled down the steel demand trend. Private corporate investment was patchy as the profitability of corporate sector was declining and uncertainty prevailed over economic return of the investment in short and medium term. A significant proportion of private investment got stalled due to various clearance issues, mostly environmental and forest. This also led to increased NPAs with commercial banks and restrained credit flow in the economy.
Public investment that has a high positive multiplier effect on the economy suffered due to paucity of investible fund as rising debt-GDP ratio was a constraining factor. Also the concern about rising CAD, inability to attract adequate FDI because of capping in foreign investment in selected sectors and other impediments of doing business in India (including lack of labour reforms, restrictive rules and procedures) had an adverse impact on investment flows.
The actualisation of a reasonably good GDP growth in boosting up the commodity sector crucially hinges on all these enabling factors that must be put in place to facilitate private investment and FDI/FII flows to crowd in public investment in critical sectors of the economy.
The author is DG, Institute of Steel Growth and Development. Views expressed are personal.