Many would agree that writing on the current status of a sector happens to be one of the most difficult tasks as opinions vary even on describing the country’s economy passing through a slowdown that is cyclical in nature or one that needs deep-drawn structural reforms.
In whatever view one holds, there is unanimity that some significant steps impacting agriculture, industry and service sectors by monetary, fiscal and trade policies including those relating to labour, corporate governance and environmental issues are required to be taken urgently and simultaneous and effective implementation of the policies would eliminate the negative biasness of the economy and reflect a rise in the growth curve.
Although earlier similar events brought out strategic prescriptions for the economy, the dynamics of Indian economy and increasing level of sectoral interdependence in the interim period have taught us a few important lessons.
Repo rate reduction is one example. During FY15 and July’19 RBI brought down in different tranches a reduction of 260 basis points in repo rate. This got converted into infrequent interest rate reduction by banks on personal loans for the households and credit to industry. RBI analysis has shown that there is a lagged impact of interest rate reduction on investment. The conversion of these lower-cost loans and credit into actual reality was, however, not simultaneous as the economic environment comprising of supply, demand and logistics was yet to provide adequate guarantee that rate of return on investment would be attractive.
It may be termed as business sensitivity or what RBI has called the Economic Policy Uncertainty (EPU) index, a rise of which, negatively impacts investment activity. Gross Fixed Capital Formation (GFCF) as a percentage of GDP (current prices) dropped down from 30.1% in FY15 to 28.2 in FY17, moved up to 28.6% in FY18 and further to 29.3% in FY19. The total public investment, which was 7.3% of GDP in FY15, moved up to 7.8% in FY18. The infrastructure and construction segment grew from 5% in FY15 to 7.5% in FY19 before going down to 2.3% in Q1FY20.
A part of household investment has also gone to real estate and contributed to the growth of this segment. However, there was a drop of total private investment from 25.3% to 23.3% during this period. Out of this, the reduction in investment rate by the household sector was prominent, dropping from 12.6% in FY15 to 9.8% in FY18, reflecting in growth rates in consumer durable segment initially growing from 4% in FY15 to 5.5% in FY19 before dropping to (-) 1.1% in Q1FY20. During this period, the private corporate investment moved up marginally from 12.6% of GDP to 13.5%. It got reflected in growth rate in capital goods segment growing from (-) 1.1% in FY15 to 2.7% in FY19.
Thus, a good deal of anticipated growth in the economy hinges crucially on improvement in EPU, which culminates on an effective combination of stimulus measures aiming at specific segments and reforms in critical segments of the economy. During April-July’19, India’s steel consumption grew by 6.6%. In this period, the total steel imports has reached 2.7 MT with a share of 8.4% in total steel consumption. This is an area that can provide some additional space for the domestic players. The maximum market share of steel imports fall under categories of HRC (import share: 14.6%), GP (import share: 21%), electrical sheets (import share: 64%), tin plate (import share: 61.4%) and large dia pipes (import share: 10.2%).
One must appreciate that steel imports to India have two components: one, which comes due to price consideration. Roughly around 40% of steel imports enter the country as they are cheaper than domestic prices. These include part of TMT, wire rods, HRC and coated products, tin plates, CRNO and pipes. Here the strategy of domestic players would be pricing the products, which are globally competitive.
Alternatively, if the entry prices are dumping prices which are not possible to match, WTO compliant trade measures (ADD/CVD/SG) may be sought by the domestic players to prevent injury to them. Another 10-12% of imports come through advance license route (duty-free steel imports against export commitment of steel containing engineering goods). This issue was highlighted recently by Engineering Export Promotion Council seeking steel supply from domestic players at import parity prices.
Out of the balance, around 40% steel get imported due to non-availability from domestic prices, those falling under line pipe plates/ HRC, auto body CRC, galvannealed sheet, CRGO/prime tinplates/ API pipes of higher strength. The balance 10% comprises of defective steel (tin plates, coated products, pipes) for which the government must enhance basic customs duties up to the bound rates (40%) and steel imports of certain grade and sizes, which are akin to what is available locally but for some alloying mix and these are exported to India by a few units not willing to get BIS licenses. Credit goes to MOS to screen these import applications through a committee of experts which has resulted in reduction of this source of imports.
Source : PTI