If someone asked you for an opinion about the general health of X based on the fact that he weighs 75 kgs, how would you react? You would most probably want to know about his height and other parameters like blood sugar, heart rate, and cholesterol level before drawing conclusions, wouldn't you?
Diagnosing the health of an economy based on GDP growth rate is similar to pronouncing on someone's health based on the weight alone. With the GDP growth rate slowing down to 5.7% during the second quarter of the current financial year (2017-18), comments on the health of the economy are flying thick and fast. It would be pertinent to dig deeper and diagnose the real health of the Indian economy. We shall attempt to do so, based on the level of activity in what can be termed as six 'core' sectors, for reasons explained below.
Cement & Steel: The demand for cement and steel is a very crucial metric in analysing the health of the Indian economy due to the two sectors of activity which account for the bulk of the demand: infrastructure and construction, both of which have a multiplier effect on the economy. It is estimated that every penny invested in infrastructure creation generates GDP growth of twice the amount. Besides, infrastructure and construction are the biggest generators of employment after agriculture, accounting directly or indirectly for 45 million jobs.
The demand for cement is estimated to grow at 3.5 to 4% in the current financial year, while the demand for steel is expected to register a growth of 6.1%. Industry sources predict a significant uptick in demand for both products in the next financial year. While the current growth figures may appear modest, there is scope for optimism given the fact that the economy is currently having to deal with stressed balance sheets and the challenges of a structural shift with the coming into force of GST and RERA.
Industrial Production: The Index of Industrial Production (IIP), which measures changes in the volume of production of industrial goods, is a reliable indicator of growth (or decline) in the demand for manufactured goods, given that production is normally driven by demand.
The IIP for the 5-month period between April and August 2017 registered a growth of 2.2%. Since the vast majority of manufacturing companies slowed down production during that period due to the transition to GST, the real picture will emerge by the end of the current financial year, by which time the situation should have stabilised.
Tractors: It would be fair to assume that growth in the sales of tractors is an indication of an optimistic outlook for the agricultural sector, which provides a livelihood to over 50% of the population of India. On that front, the Indian economy appears to be extremely well placed, with an expected growth of 11-13% in the sale of tractors in the current financial year, despite a slightly below par monsoon and uneven distribution of rainfall.
Having said that, the agricultural sector still has several structural bottlenecks to overcome to achieve long term stability, not least the over-dependence on rains, marginal land holdings and limited access to institutional credit.
Commercial Vehicles: The sale of commercial vehicles is an important indicator of the level of economic activity, since the drivers for demand are sectors such as transportation, mining, manufacturing and infrastructure, which are the key drivers of economic activity. On that count, the numbers portend good times ahead for the Indian economy, with a whopping 25.27% increase in sales volumes for the half year ended 30th September.
Rural Roads: One of the least appreciated successes of the Government of India is the Pradhan Mantri Gram Sadak Yojana PMGSY). Access to all weather roads can make the difference between abject poverty and a dignified existence for crores of rural Indians. Having constructed a record 47,350 kms of rural roads in financial year 2016-17, the Ministry of Rural Development is, by all accounts, well set to achieve its target of building 57,000 kms of roads and connecting 16,600 eligible rural habitations during the current financial year.
The long term impact of this success remains to be seen, but there is little doubt that from a long term perspective, construction of rural roads will have a far greater impact on the Indian economy than the national highways, which corner a disproportionate share of the attention of the mainstream media.
Power Consumption: Per capita power consumption is frequently seen as an indicator of a nation's progress. The most developed nations are also the biggest per capita consumers of power. India's annual per capita consumption of electricity registered a 17% increase between financial years 2014 and 2017. However, much work still needs to be done on this front, as India's per capita power consumption is less than half the global average.
Admittedly the success of the UDAY initiative helped state power utilities reduce their losses by 21.5% during the last financial year. It remains to be seen how far the central government succeeds in implementing its proposed reforms. At this point in time, it would be fair to say that the future outlook for the power sector is neutral.
And so, out of the six core sectors of economic activity, the outlook is undoubtedly optimistic for three, namely Tractors, Commercial Vehicles and Rural Roads. For the remaining three (Cement & Steel, Industrial Production and Power Consumption), the outlook is currently neutral. A clearer picture should emerge by the end of the current financial year.
- Dr. Ranjeet Mehta, Real Estate and Construction Sector Set to Create Maximum Jobs, employmentnews.gov.in (15th January 2016)
- Abhishek Dangra, The Missing Piece in India's Economic Growth Story, www.spglobal.com (2nd August 2016)
- Press Trust of India, Cement Demand Growth to be Around 3.5-4% in FY18, Business Standard (28th September 2017)
- Press Trust of India, SAIL eyes higher market share on surging steel demand, www.moneycontrol.com (22nd September 2017)
- India Infoline, India's August Industrial Production rises 4.3% (12th October 2017)
- K.T. Jagannathan, Tractor Sales May Grow at 11-13% During 2017-18, The Hindu (16th September 2017)
- Autocarpro.in, India Auto Inc in festive mood as all segments drive onto growth road (12th October 2017)
- The Masterbuilder, PMGSY Performed Better Over Other Schemes, www.masterbuilder.co.in (5th October 2017)
- Gireesh Chandra Prasad, UDAY scheme impact: State-run power discoms cut losses by 21.5% in FY17, The Mint (26th July 2017)