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Amid demand for a further rate cut by Corporate India the Reserve Bank of India chose to keep the policy rates unchanged in its fourth bi-monthly monetary policy review early this month. The repo rate, the rate at which the RBI gives loans to commercial banks, was kept at 6% while the reverse repo rate, the rate at which the RBI takes loans from commercial banks, remained unchanged at 5.75%.

The policy rates were left untouched probably because the Monetary Policy Committee felt that various structural reforms introduced in the recent period will likely be growth augmenting over the medium to long-term period by improving the business environment, enhancing transparency and increasing formalisation of the economy. If so, the lowering of interest rate could wait as both the wholesale and retail inflation rates are once again on the rise.

This is significant as the announcements to keep the policy rates unchanged came after the industry captains announced that there are no big project investment plans from the private sector in the coming two years. Among others, high cost of funds was a reason behind this, they claimed.

Interestingly, even as the industry captains themselves appeared doubtful about industry’s growth prospects in the immediate future, the core sector Industry has performed significantly better last August.

Backed by robust performance of coal, natural gas and electricity, the eight core sectors recorded a five-month high growth rate of 4.9% in August. These eight infrastructure sectors – coal, crude oil, natural gas, refinery products, fertilisers, steel, cement and electricity – had witnessed 3.1% expansion in August last year.

The infrastructure growth was 2.6% in the previous month of July. The core sector growth in August is the highest since March, when it grew by 5.2%. The production of coal, natural gas and electricity rose by 15.3%, 4.2% and 10.3%.

Moreover, the growth has been far more broad-based this time. 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.

Despite the recent turmoil and the problem of mounting liabilities of the steel companies, the steel production has recorded a spectacular turnaround in 2016-17. Aggregate steel production crossed the 100 million-mark last year recording a more than 10% increase over the previous year. Steel production had declined by 1.3% last year. And the trend has continued this year too. Twice in the first five months of the current year, between April and August, the steel production grew by more than 9%.

Interestingly, India now seen as a ‘bright spot’ for the global steel production growth following the 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.

The performance of the core sector industries will cheer the government following the criticism it faced over economic management after GDP growth declined to 5.7% in the first quarter, triggering a downgrade in growth forecasts for 2017-18 to below 7% and calls for fiscal stimulus.

A good performance by the core sector may have given some hopes for industrial recovery, but the deceleration in investment proposals is proving a roadblock for an early turnaround. According to the Centre for Monitoring Indian Economy’s report on economic outlook last July announcements of new industrial and infrastructural projects remained muted in the first quarter of 2017-18. Only 448 projects were announced during this period and this was the lowest quarterly project announcement since June, 2014 when the last capex cycle had bottomed out. Aggregate proposed investment at Rs.1.4 trillion in these projects was also significantly lower than the average quarterly proposed investment of Rs. 2.22 trillion in new projects seen in the last three years.

The new investment announcements by the government dropped further to Rs.508 billion in the first quarter of the current year. The announcement of new projects by the private sector also barely matched the last year’s level.

The manufacturing sector was hit the hardest in the present investment deceleration trend. The announcements of new investment in the manufacturing sector dropped to a two-year low of mere `375 billion during the April-June quarter. Worse, the power sector saw the proposed investment for new projects to touch the 15-year low of Rs. 60 billion in the first quarter of the current year.

According to this report, the drop in investment was the result of excess capacity build-up, weak demand, leveraged balance sheets and drop in returns on capital employed. Capital intensive manufacturing industries like steel and cement are suffering from low capacity utilisation levels and have almost lost the pricing power.

In fact, Indian industrialists while saying of no major investment possibility in the coming two years cited lack of demand and under-utilisation of existing capacity as the two major reasons for such apprehensions. And the weak trend in new investment announcements is likely to continue till demand shows a sustainable pick-up and capacity utilisation levels start rising, the industries claim.

And manufacturing demand has largely remained subdued so far. This is reflected in the Nikkei India Manufacturing Purchasing Managers’ Index (PMI). The index stood at 51.2 in September 2017, remaining unchanged from August. And although “the reading was indicative of a modest improvement in manufacturing sector business conditions in September,” as per the Nikkei in its release, it was substantially lower than the long-term trend index of 54.1.

If so, lowering of interest rate by itself would not prompt industrialists to invest in new projects. Likewise, better performance by the core industries is not likely to bring in an industrial turnaround; the country is looking at to reverse the falling GDP growth trend unless manufacturing demand and in turn, production rises.