Does the year-on-year slowdown in supply-side activity witnessed in recent months indicate a deeper malaise by way of an economic slowdown? Not necessarily. Year-on-year growth of the core sector in May 2011 was 5.3 per cent as opposed to 7.4 per cent in May 2010 and mirrored the slowdown in the growth of the overall economy during the period. Crude oil (9.7 per cent versus 5.3 per cent), fertilisers (7.3 per cent versus a decline of 6.7 per cent) and electricity (10.3 per cent versus 6.4 per cent) actually performed better during the most recent period, while steel (6.1 per cent versus 9 per cent) underperformed. The sharpest decline in production was in the natural gas and cement industries, in which growth declined by 9.6 per cent and 2.3 per cent, respectively. The sharp fall in natural gas production is largely owing to considerably lower output from Reliance Industries Limited’s D6 field for a variety of reasons that were discussed in detail in this space. In the case of cement and steel, the lower growth is owing to an industry-wide process of consolidation, since leading players are adopting a more cautious approach to expansion in the light of uncertain demand.
The “cement conundrum” typifies the widely prevailing confusion created by a marked divergence between policy announcements by the government and decisions on the ground. Cement production in the country increased rapidly between 2004 and 2008, chiefly on expectations of a sharp increase in infrastructure spending. India, with an annual production of 220 million tonnes in 2010, is the world’s second-largest producer. The delay in sanctioning infrastructure projects, especially in the road sector, has led to a huge inventory build-up, making producers reluctant to add new capacity. Thus, the actual fall in cement production in May 2010 is predominantly owing to an industry-wide consolidation as producers seek to rid themselves of unnecessary stockpiles. This is not necessarily a bad thing.
Clarity about downstream consumption will go a long way in reviving the fortunes of these two vital industries. While consumption of steel is largely determined by global economic conditions, cement consumption would be largely impervious to external influences as long as the government remains committed to ramping up domestic infrastructure, as in China. Recent assurances by the government to streamline and expedite the award of road construction contracts, especially those under the purview of the National Highways Authority of India, augur well for both the cement and steel industries.
Core industries can add directly to GDP, while simultaneously paving the way for growth in output to be sustained. China’s growth during early stages of economic expansion was powered by public investment and procurement that allowed upstream producers to achieve scale economies. This is not always optimal because it can result in investment becoming an end in itself. There is no reason India cannot achieve the same results as China while avoiding its excesses. A vibrant core sector can and should be the bedrock of growth acceleration.