The primary source of revenue for the government would be higher tax collections as the latest data show, but would be constrained by slower realisation of PSU disinvestment.
The power of data is unlimited. It creates and destroys many beliefs, apprehensions, generates hopes and despair, but continues to be the strongest tool in the hands of statisticians and analysts. First, the mid-year review of the economy puts real GDP for FY16 at 7-7.5% and nominal GDP at only 8.2%. The projected real GDP for the full year is therefore 1% lower and nominal GDP is more than 3% lower than what was envisaged in the Budget. The drop in nominal GDP can be explained by widening gap between WPI and CPI used as deflators, which have reached 8.5% in Q2 of FY16. It would only make the fiscal deficit considered to be 3.9% of GDP, larger by another 0.2%.
The primary source of revenue for the government would be higher tax collections as the latest data show, but would be constrained by slower realisation of PSU disinvestment. The current account deficit in H1 of the current year is contained at 1.2% of GDP. Foreign exchange reserves rose to $352.1 bn in first week of Dec ’15 and net FDI inflows have grown to $17 bn in H1 of FY16. Two critical elements of the economy are private final consumption expenditure which has been growing at the rate of 6.8% in Q2 of current year (down from 7.9% in Q4 of FY15) and Gross Fixed Capital Investment (GFCF) rising at 6.8% in Q2 of current year compared to 4.1% in Q4 of the previous year.
However, it is also true that the share of GFCF as a percentage of GDP has been continuously coming down from average 31% in 2011-12 to 2014-15 to 28.1% in H1of FY16. Aggregate capital expenditure has risen by 0.5% of GDP.
Particularly with respect to agriculture and rural development the government expenditure has risen by 9.9% in H1 of the current year. Also there is a predominant trend of replacing current expenditure with capital expenditure.
Public investment, however, still continues to be the weak link in pushing up the growth.
The other two related elements to boost the economy are government expenditure and private corporate sector investment. The latter is either stagnant or coming down in the past few quarters due to depressed prices and subdued demand that bring down the prospective return to investment. The corporate balance sheets being highly stressed with high indebtedness have further pulled down the enthusiasm for investment. The additional factor causing worry is the lower contribution of exports to economic development.
The credit growth by scheduled commercial banks to manufacturing, mining and construction sectors has sharply dropped from the average 22% to 4.5% in H1 of FY16 as compared to the previous year. Does lower demand for credits indicate less working capital requirements because of subdued demand for end-products? It also points out the existence of uncertainty plaguing the fate of all investments. It must be acknowledged that parliamentary logjam in getting through GST and other important Bills that could have dispelled or minimised the shade of uncertainty in the business environment is yet to happen.
The volume-based indicator Index of Industrial Production is showing signs of green shoots in the economy and may help the steel industry. In October, growth of industrial production at 9.8% is contributed by significant growth in manufacturing (10.6%), which is boosted by growth in capital goods of 16.1% and by consumer durable segment by 42.2%. Have these indices impacted the steel industry? In November, real steel consumption has sprung up by as high as 11.2% over the last year. It is noted that there was a substantial reduction in inventory accumulation by major producers from 1.3 million tonne to 0.5 million tonne. As prices of steel continue its southward journey, the release of accumulated stocks was driven by the market realities.
Summing up, despite contradictory movement of some economic indicators, the volume-based indices signal a revival of fortunes for the steel industry. Latest import restrictive measures and the mandatory quality notification by the government must reiterate this trend.
The author is DG, Institute of Steel Growth and Development. Views expressed are personal.