April , 2023
Higher infrastructure spending to boost core sector growth
15:27 pm

Tushar K. Mahanti

Moody's Investors Service has recently raised India's economic growth estimate for 2023 to 5.5% from 4.8% projected earlier. The upward revisions were influenced by the sharp increase in capital expenditure in the last budget to `10 trillion accounting for about 3.3% of GDP for fiscal year 2023-24 – up from `7.5 trillion for 2022-23.

The RBI, however, appears more optimistic and argues that if effectively implemented, the record rise in capital expenditure can take India's real GDP growth close to 7% in 2023-24. The Economic Survey 2022-23 earlier projected a baseline GDP growth of 6.5% in real terms in the next financial year. The projection was broadly comparable to the estimates provided by multilateral agencies such as the World Bank, the IMF, ADB and other rating agencies.

The finance ministry’s report released last month projected India’s GDP to grow at 7% in 2022-23 despite global headwinds. The monthly economic review by the ministry reportedly said that, "Supported by the gains from high services exports, the moderation in oil prices, and the recent fall in import-intensive consumption demand, India's current account deficit is estimated to fall in FY23 and FY24, providing a buffer to the rupee in uncertain times."

The sharp rise in net service exports in 2022-23 over the previous year is a critical development as India increases its market share in both IT and non-IT services, whose demand has been triggered by the pandemic, the report said, adding that imports are also less costly now with the easing of global commodity prices.

Sharp rise in capex to boost core sector growth

The question is: While the world at large is apprehending a recession in 2023 and the GDP growth of most of the developed countries is predicted to decelerate, what caused India to project a high growth rate? The answer probably lies in the Indian economy’s resilience to withstand the geo-political turmoil caused by the Russia – Ukraine conflict. India has largely succeeded in keeping its supply chain insulated from the turmoil and as a result, has succeeded in keeping inflation rate under control.  

A lower inflation has allowed the consumption demand to rise even as higher government spending in infrastructure has created more jobs. The recent buoyancy in economic activities is expected to continue with significant increase in infrastructure expenditure of the government in the coming months. The government’s continued focus on infrastructure creation as enunciated in the Union Budget for 2023-24 is likely to have a multiplier effect on the economy, boosting demand across the board. Higher public spending on asset creation while maintaining fiscal prudence will create jobs and boost consumption.

Budget 2022-23 has increased capital spending by a whopping 33%. In line with the government’s ambitious economic agenda, the Budget focuses on a strong impetus to growth and to strengthen macro-economic stability. Among the many priority areas outlined in the budget, infrastructure development was chosen as to be the main driver of growth and employment.

The core sector is also known as infrastructure output as they represent the basic industries that form the base of the economy. The core sector is sub-divided into sectors that can be directed by government policy and sectors that are driven more by demand. For example, the oil sector is a function of demand and government policy as is natural gas. Cement is normally more a function of demand and the construction activity than of government policy. Steel demand is also an outcome of a rise in economic activity but the government has been supportive in the last few years through a more progressive anti-dumping policy. The core sector industry accounts for more than 40% of the IIP and hence is an important determinant of growth.

Core sector is considered as the turnaround indicator. Economic activity picks up when the core sector number picks up and vice versa. Sectors such as cement, steel and electricity are strong lead indicators for a revival in economic growth. These sectors have a strong multiplier effect on growth and that is normally positive for a revival in growth. And since higher production is associated with higher demand, better core sector numbers signals revival of consumption and is conducive to higher growth.

The government’s focus on infrastructure creation, specifically housing, roads, railways, commercial and domestic real estates, and defence procurement comes as good news for the steel, cement, power, and refractory industries. Infrastructure output, which comprises eight sectors including coal and electricity accounting for nearly two-fifths of industrial output and thus, any push to develop infrastructure would automatically drive the industrial growth.

Core sector performance

The core sectors have a major impact on the economy and significantly affect the performance and the functioning of most other industries as well. Their output helps to measure the physical volume of basic industrial production in India. Their progress is used by government agencies for policy-making purposes.

Since the core sector industries form the backbone of the country’s industrial base, the government has all along nurtured the sector with timely policy interventions, financial facilitation and research and development initiatives. This is reflected in the sharp rise of core sector output over the years. India's steel production has reached a historic level of 120 million tonnes per year making it the world's second-largest producer of steel. The production has doubled in the last eight years from 60 million tonnes in 2013-14. The installed capacity of steel has increased from 75 million tonnes to 154 million tonnes during the same period. 

With continued emphasis on asset building, the demand and production of cement in India has increased steadily. In five years, between 2016-17 and 2021-22, cement production in India has increased by 40% from 273 million tonnes to 381 million tonnes.

India is currently the world's second-largest cement producer after China, with an installed capacity of around 540 million tonnes, and is estimated to rise over 600 million tonnes by 2025. India's expansion and growing urbanisation, along with the government's smart city initiative programs and poor friendly cheap housing projects, is expected to make the cement market to grow substantially in the coming years. The housing industry utilises 67% of all the cement that is consumed in India, with infrastructure using 13%, commercial buildings using 11% and industrial construction using 9% of the total production.

The cement demand in India is estimated to touch about 420 MT by FY 2027. As India has a high quantity and quality of limestone deposits through-out the country, the cement industry promises huge potential for growth. 

Power is probably the most important infrastructure component for economic development. India’s power generation sources range from conventional sources such as coal, lignite, natural gas, oil, hydro and nuclear power to viable non-conventional sources such as wind, solar, and agricultural and domestic waste.

The power sector is undergoing a significant change that has redefined the industry outlook. Sustained economic growth continues to drive electricity demand in India. The government’s focus on attaining ‘Power for all’ has accelerated capacity addition in the country. Although power generation has grown more than 100-fold since independence, growth in demand has been even higher due to accelerating economic activity.

India is the third-largest producer and consumer of electricity worldwide, with an installed power capacity of 408.71 GW as of October 31, 2022. What is significant is that over the years India has succeeded in becoming a power self-sufficient economy. 

If the core sector industries have done well so far following higher economic growth, the finance ministry’s push to the infrastructure sector to boost growth in recent years is expected to give further fillip to the sector. In fact, the sector has been doing well after the sharp rise in capital expenditure in the last budget.

The combined Index of Eight Core Industries (ICI) increased by 7.8% in January 2023 as compared to the index of January 2022. The cumulative index rate of ICI during April-January 2022-23 was 7.9% as compared to the corresponding period of last year.

Steel production (weight:17.92%) increased by 6.2% in January 2023 over January 2022. Its cumulative index increased by 7.1% during April to January 2022-23 over the corresponding period of the previous year. Cement production (weight: 5.37%) increased by 4.6% in January 2023 over January 2022. Its cumulative index increased by 10% during April to January 2022-23 over the corresponding period of previous year.

Electricity generation (weight: 19.85%) increased by 12% in January 2023 over January, 2022. Its cumulative index increased by 10.1% during April to January 2022-23 over the corresponding period of previous year.

Coal production (weight:10.33%) increased by 13.4% in January 2023 over January 2022. Its cumulative index increased by 16.1% during April to January 2022-23 over the corresponding period of the previous year.

The growth story of India’s core sector so far is encouraging and in line with the GDP growth projection of the finance ministry. It is expected that with higher capital expenditure in the coming fiscal, the sector would continue to reach higher scale. 

The eight core industries are critical in meeting the demand for inputs across industries. The growth in these industries has held steady, reflecting a broad momentum in industrial activity. Their growth underscores the importance that nations have been attaching to the indigenous presence of core capacities in the aftermath of the pandemic and the Russia-Ukraine conflict breaking down the global supply chain. 

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