Core concerns could pull down domestic revival

If Monday’s mayhem in the stock markets was a wrinkle for investors, the Union government’s assurance that the fundamentals of economy are quite strong and that the downslide is attributable to external factors maybe heartening albeit insufficient. A closer look at the core sectors of economy shows that the state of affairs are far from satisfactory and worse in the last five years, including the worst-performing years of the UPA government. The depression could even have a ricocheting impact on the government’s Make in India push.

At 2.4 per cent, the overall growth in core industries during the first quarter has been lower than annual averages since 2010-11, which have been upwards of three per cent and even as high as 6.6 per cent in 2010-11. The performance, according to the government data that capture production in eight core industries, has been the worst in years.

“It would, however, be imprudent to read too much into a single-quarter data as core sector data tend to be relatively volatile. But for some core sectors such as steel, this would be the worst phase in a decade, given the subdued demand conditions, increasing competition from imports and sharp slide in steel prices,” said Ajay Srinivasan, director, CRISIL Research.

Barring coal and refinery products, there has been a fall in six core industries in the first quarter compared to April-June 2014 figures.

“Core sector production has been impacted by weakness in the investment cycle and sector-specific factors such as increase in competition from imports (for steel), weak financial position of distribution companies (in case of electricity) and increase in trading (of complex fertilisers),” said Srinivasan.

According to Debasish Mishra, senior director, Deloitte, the depressing figures could be attributed to almost no pickup in the investment cycle. In the private sector, investment has completely halted, while public investment is yet to lift up.

“In coal, a favourable performance has been possible because of 11 per cent year-on-year growth in Coal India production even though the sector saw a complete arrest in private sector production,” he said, adding that basic lending and investment in core sectors are still not growing.

A revival in these sectors could take some more time. Mishra said even though the troubles in these sectors seem to have bottomed out, from September onwards there could be an improvement.

“We expect to see a gradual revival in core sector production by the second half of 2015-16, led by pickup in demand from the infrastructure space,” said Srinivasan. He pointed out that in infrastructure sectors like roads, there has been a slew of policy measures and higher budgetary support. Execution of national highway projects has also picked up, indicating reduced policy-related bottlenecks.

“This would have a positive spin-off on allied sectors such as cement and construction. However, despite policy announcements like “housing for all”, real estate construction is yet to gain traction,” said Srinivasan.

In the power sector, financially fragile distribution companies (discoms) are wary of committing to long-term purchase agreements. The financial restructuring plan (FRP) for discoms, notified in October 2012, envisaged regular tariff hikes and reduction in aggregate technical and commercial (AT&C) losses.

“While tariff hikes were high in the first two years following FRP, things have fizzled out since then. On the AT&C front, there has hardly been any progress,” said Srinivasan.

In fact, electricity shows a dismal 1.5 per cent growth during April-June 2015 period compared to 11.3 per cent growth in the corresponding period last year.

He said the push for manufacturing in India is a long-term policy initiative aimed at creating a policy environment and putting in place adequate infrastructure to enhance the ease of doing business.

“The depressed demand in core sector would impact the sentiment in these sectors, but temporal gyrations caused by market-related factors should not dilute focus on the policy objective of giving a nudge to manufacturing in India,” he said. Besides, as Mishra pointed out, the Make in India initiative could drive demand in core sector. The signals of such revival would be first visible in the service sector and then in the government-led sectors like railways, roads and even coal.

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