June , 2017
Core sector industry bucks trend, grows at a higher rate in 2016-17
16:19 pm

Tushar K. Mahanti

India’s steel production has crossed the 100 million-mark in 2016-17. Leaving behind the woes of falling demand, indifferent prices and mounting debt liabilities of the steel companies, the steel production has increased by a record 10.7% to 100.74 million tonnes last 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. The production of core sector industries has increased at a considerably higher rate this time compared to 2015-16. 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 has grown 7.1% in 2016-17 against 8% in the previous year. But for a sharp rise in agricultural production the decline in GDP growth rate would have been even higher. Following a good monsoon the gross value added (GVA) of agriculture sector has increased 4.9% in 2016-17 against an in crease of 0.7% in the previous year.

The growth rate of manufacturing GVA has declined by 2.9 percentage points from 10.8% in 2015-16 to 7.9% last year. Index of industrial production has increased 5% as per the revised base year (2011-12). In terms of earlier base year (2004-05), the overall index of industrial production has grown only 0.7% in 2016-17.

The variation between these two estimates is huge and even if one takes the new estimates as the reality, the industrial sector is left with a gigantic task to bring back the rising trend in GDP.

The good news is that the production of core sector industries has increased at a considerably higher rate this time compared to 2015-16. The output of eight core industries, as reflected in their combined index, rose by 4.8% in 2016-17 compared to 3% in the previous year. This rise will not only contribute to overall industrial production but will also act as catalyst of growth for other sectors.

Moreover, the growth has been far more broad-based this time. Look at coal production: the aggregate production in the country grew by 3.2% to 671.7 million tonnes in 2016-17. The production could be even higher but for the reduction in production target for Coal India from 660 million tonnes (mt) to 600 mt in the current year due to tepid demand for the fuel from thermal power plants.

Cole India, the monopoly state-owned miner, has reportedly a stock of about 69 mt of coal at the end of the year. In addition, power plants across the country have more than the required stock of coal. Faced by excess stocks of power plants and its own inventory, Coal India produced 554.1 mt of coal in 2016-17 against a target of 598.6 mt.

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. 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 has 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.

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.

Electricity generation, the basic catalyst of industrial growth, has continued to touch new highs – the country generated 1242368 million KWH electricity in 2016-17 against 1173602 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 2011-12 and 2016-17, the energy deficit in the country has declined from 8.5% to 0.7%. The peak deficit as per cent of requirement has declined from 10.6% to 1.6% during the same period. And if the government’s generation target for 2017-18 is met, the country may finally wipe out the power deficit. The electricity generation target from conventional sources for 2017-18 has been fixed at 1222.100 BU comprising of 1042.028 BU thermal, 141.400 BU hydro, 40.972 nuclear and 5.000 BU import from Bhutan. This is about 6% more than what was generated in 2016-17.

Another core sector industry, cement, whose growth is directly linked to infrastructure development, too has, however, witnessed a decline in production in 2016-17 for the first time in 15 years. The analysts blame demonetisation as the primary cause for this fall.

After the government withdrew high-value currency notes, the growth of cement production slowed down to 0.5% in November and further to 9% in December. The aggregate production in declined by 1.2% in 2016-17 against 4.6% rise in the previous year. This is reflected in the decline in the growth rate of GVA of the construction sector.

Interestingly, despite cement demand in 2016-17 being the weakest in ten years, average prices have increased about 5% as they are more of a function of supply moderation and pricing discipline that demand growth.

 With the situation coming back to normal after demonetisation, construction activities have begun picking up since last January. This is expected to increase demand for cement and by extension, its production in the current year.

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