GDP estimates for Q3 are almost on the expected line. It appears that the measures taken by the government, specifically the tax cut of the corporate sector, withdrawal from RCEP to lend support to industry suffering from demand dryness, RBI guidelines to revive NBFCs and regular reduction in repo rate, need some more time to be strongly effective in reversing the trend. The report that 30 MNCs are planning to shift operations from China to India to take advantage of 15% corporate tax fixed for the new companies sounds good and would facilitate FDI in critical sectors. It is widely believed that Q3 performance of the economy would be better as the slow demand growth visible in the later part of Q2 is likely to be stronger in the coming months.
In Q3 of FY19, Indian economy grew by 6.6% and by 5.8% in Q4. If these rates are superimposed on today's growth numbers, may be in reversed fashion, GDP in FY20 may reach a growth level of around 5.7% in the minimum which, still lower than 6.1% projected by IMF, is feasible to achieve and creditable in the global context.
For steel industry, it is the GFCF rate as a percentage of GDP which impacts maximum demand from building, construction and infrastructure sector, together accounting for around 68% of total steel consumption in the country.
GFCF measured at market prices, which was 30% of GDP (current prices) in Q1 of FY19 has since come down to 27.8% of GDP. While the government is equally concerned of a rising fiscal deficit (the target deficit for FY20 almost reaching), the support from a higher private corporate investment is yet to surface. The private final consumption expenditure, a major factor influencing demand for automobile, consumer durables and residential housing, has increased by 4.1% during H1 of FY19 which is significantly lower than 8.5% growth achieved in H1 of FY19 over H1 of FY18. The reduction in repo rate is yet to get reflected in lowering the prime lending rates of the banks. The government's final consumption expenditure in Q2 at constant prices has reached 12.4% of GDP over 11.6% in Q1. This is encouraging as rising consumption expenditure by the government leads to higher current demand for a host of commodities.
The manufacturing sector has been through a rough patch in the recent period (1% growth in H1). The MSME sector accounting for more than 75% share in manufacturing has suffered for lack of credit flow from the NBFCs. It has adversely affected the export of engineering goods having a share of 25% in total exports of the country and has resulted in a lower demand for steel categories. During the first 6 months of the current fiscal, only manufacture of basic metals grew (+13.7%), out of which production of MS Slabs and Railway Materials have shown significant production growth due to growth in export demand and growing demand from Railways.
It is interesting to note that out of the 8 core industries (combined weight of 40.3% in IIP) the growth achieved in steel industry (weight around 18% in IIP) during the first 7 months of the current fiscal is the highest at 6.7% against 3.3% growth in FY19.
In the global estimates, India's crude steel production during January-October 2019 reached 93.3 MT (@ 2.8% growth over last year), while Japan, South Korea and Russia had observed downward trends in production.
In the last few weeks there has been a discernible increase in global steel prices. Chinese export offer of SS-400 grade HRC ex-Tianjin has gone up from $ 427/tonne in October 2019 to $ 458/tonne in November 2019, US domestic prices moved up from $ 520/tonne ex-works to $ 592/tonne during the period. Turkish export offer for Rebar also went up from $ 412/tonne to $420/tonne during the period.
Correspondingly, India's domestic prices moved up by Rs 500-1,000 per tonne in respect of HRC. Price rise, even if by small amount, reflects a possible return for revival, albeit slow.
Domestic prices in China (average domestic price of HRC ex-works in China rose from RMB 3520/tonne in October 2019 to RMB 3730/tonne in late November 2019 and it had resulted in lowering of export thrusts providing some extra space for exports from CIS and Vietnam.
It is pertinent to mention that steel exports from India in first 7 months of the current fiscal at 6.3MT have also shown a rise by 23% compared to the level in last year thereby making India a net exporter of steel after a gap of many months. Thanks to the government measures of import registration by SIMA and strict monitoring of mandatory standards, the imports in categories like HRC, CRC, Plates, Coated products, Electrical sheets and Tin Plates have gone down in the current year.
India has become a net exporter in HRC and semi finished steel during the current year. The export thrusts by India are to be sustained taking advantage of recent mark-up in global prices and rise in domestic prices in China.
(Views expressed are personal)