New Delhi is happy. The International Monetary Fund (IMF) has projected a bigger role for India in future global growth dynamics. The IMF has observed that India’s economy can be a long-term source for global growth.
India has three decades before it hits the point where the working-age population starts to decline, the IMF has observed. For the next three decades, it could be a source of growth for the global economy. India can be almost what China was for the world economy hitherto.
For the present, the IMF has projected economic outlook to improve in the medium term and GDP growth to rise to about 7.75% next year. This is largely because of a robust growth in private consumption and a recovery in investment, supplemented by progress in bank balance sheet repair, improved credit growth, and ongoing structural reforms, most notably the productivity-enhancing effects of Goods and Services Tax (GST).
The World Bank and Asian Development Bank, too, have projected brighter picture of Indian economy. Back home, the RBI has said that based on various growth indicators the economic activity has continued to be strong. The progress of the monsoon so far has raised hope for a better crop output. Higher corporate earnings, especially of fast moving consumer goods companies, also reflect buoyant rural demand. Investment activity remains firm even as there has been some tightening of financing conditions in the recent period. Increased FDI inflows in recent months and continued buoyant domestic capital market conditions bode well for investment activity, RBI has observed. The Reserve Bank’s April-June round of industrial outlook survey indicates that activity in the manufacturing sector is expected to remain robust in Q2, though there may be some moderation in pace.
Based on an overall assessment, the central bank has retained GDP growth projection for 2018 - at 7.4% in its bi-monthly monetary policy statement in August – same as it suggested in its statement last June.
The GDP growth projection of the IMF, the World Bank or the RBI is reflected in the recent performance of India’s core sector industries, which forms the backbone of the industrial sector. Core sector growth has soared to a seven-month high of 6.7% last June following sharp rise in coal, cement and steel output. To note, the sector had grown just 1% in June last year. In fact, the core sector has grown consistently during the last six months – grew by over 4.5% in each month except in May when the growth was marginally lower at 4.3%.
The output of core sector industries increased at a considerably higher rate in 2017-18 compared to 2016-17. Following the extraordinary emphasis given to infrastructure growth, the core industries whose future is directly linked to this sector’s prosperity, have begun to grow at a faster rate.
This is significant as the onus of turning around the GDP growth now rests largely on the industrial sector. The gross domestic product grew 6.7% in 2017-18 against 7.1% in the previous year. Much of this was, however, due to a decline in the growth rate of agricultural gross value added (GVA). Agricultural GVA at 2011-12 prices grew 3.4% in 2017-18 against 6.3% in the previous year. Monsoon so far has been good but in the context of a declining share of agriculture in the GDP the onus of generating higher GDP now largely rests on industry.
The good news is that the production of core sector industries has increased considerably. The output of eight core industries, as reflected in their combined index, rose by more than four per cent during the last two years. In the first quarter of the current year the index has grown 5.1%. This rise will not only contribute to overall industrial production but will also act as a catalyst of growth for other sectors.
Coal production rises despite supply bottleneck
Moreover, the growth has been far more broad-based this time. Look at coal production; aggregate production in the country grew by 3.1% to 688.76 million tonnes in 2017-18. The production could be even higher but for lower production of Coal India Ltd (CIL). According to provisional data, CIL produced 567.37 mt in FY 18, achieving 95% of its target of 600 mt for the year.
Coal India reportedly, slowed down production as inventories at power plants rose amid a shift in demand to alternate sources caused by a slump in renewable energy tariffs. According to a Bloomberg report, India added the least amount of coal-fired power capacity in more than a decade.
Weak demand from thermal power plants apart, coal despatches suffered due to poor railway infrastructure. Several new tracks are behind schedule, which meant sales couldn’t keep pace with expansion in production, they added.
The broad-based improvement in core-sector growth is expected to raise the overall index of industrial production too. The core infrastructure industries have a combined weightage of about 38% in the IIP. This is reflected in the higher growth in manufacturing output in the current year. Manufacturing output has grown 4% during April-May 2018 against 2.8% in the same period last year.
Steel industry coming out of past misery
Despite recent turmoil and the problem of mounting liabilities of the steel companies, the steel production has recorded a spectacular turnaround. India’s steel output has crossed the 100 million-mark for the second year in running. Leaving behind the woes of falling demand, indifferent prices and mounting debt liabilities of the steel companies, the steel production has increased 5.6% to 106.36 million tonnes in 2017-18 after growing a record 10.7% in the previous year.
The good performance by the steel industry, a major constituent of the countries core industry group, has significantly impacted the overall performance of the core industries.
Interestingly, India has now seen as a ‘bright spot’ for the global steel production growth following government’s move to augment capacity and demand from the construction, automobile and infrastructure sector. Steel majors Steel Authority of India and Tata Steel are expected to drive the growth in steel output according to a recent report by BMI Research, a Fitch group company. “The government has been spearheading the push towards the boost in steel production capacity, with upgrades being made to existing steel mills and state-owned companies stepping in to build new steel plants,” it said. The country’s share of global steel production will accelerate from 5.4% in 2017 to 7.7% in 2021, the report said.
In the process India is tipped to displace Japan as the second biggest steel producer. In 2016 steel production was boosted by new capacities coming on stream from Sail and Tata Steel. The latter began trial production at its Kalinganagar factory in 2016.
Cement production rises following infrastructure investment
On the back of growing demand, due to increased construction and infrastructural activities, another core sector industry, cement whose growth is directly linked to infrastructure development, too has witnessed a turnaround in 2018-19. Aggregate cement production grew 6.3% last year against a decline of 1.2% in 2016-17.
With the situation coming back to normal after demonetisation, construction activities picked up since January 2017. This increased demand for cement and by extension, its production.
India is the second largest producer of cement in the world. No wonder, India’s cement industry is a vital part of its economy, providing employment to more than a million people, directly or indirectly. Ever since it was deregulated in 1982, the Indian cement industry has attracted huge investments, both from Indian as well as foreign investors.
Cement demand is likely to grow about 4.5% in 2018-19 on the back of higher infrastructure spend, rating agency ICRA said. This demand growth is bolstered by a pick-up in the housing segment — primarily affordable housing, rural housing and higher infrastructure spend, the agency has observed. Improved rural incomes, higher rural credit and increased allocation for rural, agriculture and allied sectors are likely to boost rural housing demand.
Higher electricity generation reduces energy deficit
Another core sector major, power too has performed consistently in recent years. Electricity generation, the basic catalyst of industrial growth, has continued to touch new highs – the country generated 1308196 million KWH electricity in 2017-18 against 1242106 million KWH in 2015-16.
The steady growth in installed capacity and generation has sharply reduced the extent of power deficit in the country. In five years, between 2012-13 and 2017-18, the energy deficit in the country declined from 4.2% to 0.7%. The peak deficit as per cent of requirement declined from 4.5% to 2% during the same period. And if the government’s generation target for 2018-19 is met, the country may finally wipe out the power deficit. The electricity generation target from conventional sources for 2018-19 has been fixed at 1265 billion units. This is about 4.87% more than what was generated in 2016-17. Whether India will lead the global GDP growth chart in the coming years, as suggested by the IMF, is debatable. But the good performance of its industries will definitely boost the chances of meeting higher GDP growth targets.