It is quite in tune with the general feeling that RBI, in its mid-year review that happens to be the last one by the outgoing governor, decided to keep the interest rate unchanged. Immediately afterwards, the CPI data reveals that the retail inflation index has crossed the 6% benchmark (6.07), justifying the RBI prescriptions. Meanwhile the inflation targeting for the next three years at 4% with a band of 2% by the high-power committee of the government has been announced to lay down the roadmap for the most critical element in monetary policy. For the next few months, however, it may be a slightly challenging target as higher spending on food, clothes and consumer durables would likely be regular characteristics of the private consumption expenditure, with festive seasons in the offing and the largesse out of the Seventh Pay Commission fuelling this demand. Already, the sector is growing at a respectable 7.8% in the first quarter of the current financial year. The food price index has gone up by 8.35% in July 2016, with vegetables and pulses accounting for the maximum growth. The manufacturing price index (WPI) in June has gone up by a subdued rate of only 1.17% and out of manufacturing, the price index for iron and semis exhibits a negative 7% growth in the month, starting with a negative growth of 13.46% in January 2016. The relative price movement in food and manufacturing has implications for the sectoral growth pattern.
Generally, a rising price would improve supply as more and more producers would enter the market (perishable goods) in expectation of better returns. This would normalise prices in due course. Similarly, a continued price deflation for iron and semis would keep away fresh suppliers and encourage existing suppliers to rein in supply to just match the current demand. As infrastructure investment has a minimum gestation lag, the very commencement of new projects would only improve the business sentiment for undertaking capital expenditure, and the commensurate rise in prices would ultimately improve the financials of the existing producers and attract more investment into the sector.
Industrial production data continues to project a suppressed scenario. It has risen by a mere 2.1% in June, contributed primarily by electricity generation of 8.3% and mining of 4.7%. The manufacturing sector, with more than 75% weight in IIP, has grown by 0.9% during the month after covering the negative growth in the previous month. For the steel industry, the most steel-intensive segment, namely the capital goods sector, has actually fallen by a massive 16.5% in June with the electrical equipment segment experiencing the largest fall of more than 46% in the month and furniture manufacturing coming down by 9%, while the machinery and equipment segment rising 6.4%. Expectedly, the manufacturing of motor vehicles and other transport have, on an average, experienced more than 8.7% growth.
HR coil consumption (non-alloy) in the country in Q1 has grown by 17% in spite of lower imports, totalling 189 thousand tonne, which has made the domestic players enhance supply by 607 thousand tonne during the quarter. Cold rolled sheets and coils have been consumed 13% more in the country with lower imports of 186 thousand tonne and higher availability of 115 thousand tonne from domestic sources. Exports of CR are also lower in the current year. The steep fall in output of electrical equipment has also reflected in a lower consumption of around 11% in the first quarter of electrical sheets (CRNO/CRGO). Consumption of bars and rods (wire rods/rebar) has grown by nearly 6% during the quarter by lowering imports and enhancing domestic availability. The MIP has contributed to lowering imports of sizes and grades that are otherwise abundantly available from domestic mills.
Hopefully the AD investigation would definitely establish the injury suffered by the domestic producers due to dumping of these steel products below their fair and normal prices, install appropriate remedial measures and boost up steel consumption level significantly beyond 0.5% growth achieved in the first four months of the current year.
The author is DG, Institute of Steel Growth and Development. Views expressed are personal.