Slowdown spreading across all core sectors in India
Moneylife Digital Team 20 June 2011

The Indian economy is considered to be driven by domestic demand. However, during FY2011, eight core industries—coal, crude oil, natural gas, petroleum & refinery products, fertilisers, steel, cement and electricity, registered a growth of 5.72% against 6.64% a year ago, mainly due to sluggish demand

It's official now. It seems like the slowdown is spreading across all sectors. The main culprit seems to be sluggish demand in almost all the eight core industries (coal, natural gas, petroleum & refinery products, fertilisers, steel, cement and electricity). Coal in particular has reported sluggish growth, thanks to poor supply conditions.

The Indian growth story may still be playing out, but raging inflation and this slowdown in core sectors might well spoil the party-and the projected annual GDP (gross domestic product) growth of 8.5% might just become a tough target.

According to recent statistics released by the Office of the Economic Advisor (OEA), the index of eight core industries stood at 137.88 in April 2011 and registered a growth of 4.6% compared to 8.5% registered in April 2010. During FY2011, the eight core industries registered a growth of 5.72% as against 6.64% during FY2010. A major factor for this performance (or rather, the lack of it) is the sluggish demand which has affected industries like steel, cement and power. Apart from the core industries, sectors like textiles and realty have been hit by poor demand as well.

As far as coal is concerned, the demand exists, but supply constraints have hit the industry. Energy-intensive manufacturing units depend on coal as their main source of energy. In FY2011, coal production registered a decline of -0.30% compared to an increase of 8.12% in FY2010. Natural gas declined as well. Production fell from a growth of 44.59% in FY2010 to 9.97% in FY2011.

This in turn has affected energy generation. During May 2011, only 31.50 metric tonnes (MT) of coal was received by thermal power stations of various utilities, against their total requirement of 36.9MT, which was just 85% of requirement. As on 31st May, 26 power stations had critical stock including 17 stations with super-critical stock—supply for less than 4 days of production.

Energy generation, which grew by 6.17% during FY2010, registered a mediocre growth of 5.48% in FY2011. What's even more surprising, the market snapshot of the Indian Energy Exchange (IEX), shows that there has been a reduced demand for energy from March onwards.

The total volume of 'buy' bids from March 2011 till date on the IEX was 62.79 lakh MWh (megawatt-hour) and 'sell' bids summed up to a total of 76.13 lakh MWh, an excess of 13.33 lakh bids. The norm is that 'sell' bids are usually at much higher prices and this pushes down demand. With the pressure to sell, prices have fallen further.

The average market clearing price (MCP, or the rate at which energy is sold) on the IEX, averaged Rs3,413.13/MWh for January 2011, has fallen to Rs2,619/MWh for the current month. This fall in price shows there is a fall in demand for electricity compared to the previous months and suppliers are not getting their price.

The cement industry, which registered a growth of 18.5% in October 2010, slumped by 2% to 16% in April. In this month, the industry registered a decline of 1.06% over the previous year, compared to a growth of 8.76% in April 2010, according to IIP (Index of Industrial Production) data. The onset of the monsoon and the decrease in demand from construction industries, does not spell good news for the cement industry either.

Steel production has declined as well. The sector registered a growth of 4.8% in April 2011 compared to 12.9% in April 2010. From March-April 2011, steel production has dropped by 12% compared to a drop of 7% during the same period last year.

The demand for steel and cement depends on the infrastructural development within the country and additional infrastructural projects taken up by the government.

According to an analyst (who preferred anonymity), "In FY11, the supply of cement outstripped demand mainly due to the end of the Commonwealth Games and political issues in Andhra Pradesh (AP). Due to these factors, there was a low base demand in FY11 which will continue in the whole of FY12. Utilisation level of cement has fallen, in AP itself it was down by 10%-15%. Demand was sluggish in April and May. With the onset of the monsoon, demand would continue to be sluggish and there might be a price correction of around 5% and volume growth of around 7.5%-10%.  Apart from eastern India, where demand has always been subdued, there was capacity building across other regions in India."

The realty sector is experiencing a severe crunch as well. The NCR (National Capital Region) and Mumbai have been worst hit. On one hand, the RBI (Reserve Bank of India) has gone for successive hikes in repo rates which have made home loans dearer, and on the other, increased restrictions on borrowing have made it difficult for builders to get funds for their projects. Last year saw a steep rise in housing prices, and now neither investors nor customers are willing to buy homes at sky-high rates. The Union ministry of housing has reported that by 2012, India will need 26.30 million houses—but 92,000 units remain unsold in Mumbai. Since offtake has been nil and returns have been poor, many financers have pulled out, and others are reluctant to enter the sector. Builders are blaming the delay in getting clearances and rise in stamp duty as the reason for price hike, but such excuses are losing credibility.

The slack in demand has hit the textiles industry too. This industry, which contributes about 14% to industrial production and 4% to GDP, has been witness to a fall in cotton prices over the past few months and oversupply of cotton yarn in the domestic market.

"Prices have been crashing, as there is no demand in India as well as in the export market", a Rajkot-based cotton exporter told Moneylife.

Further, an industry expert added, "This problem of the textile industry will persist for entire FY11. There are simply no orders from Europe and the US. The situation will remain grim even as the prices of cotton and yarn are falling as there will be selling pressure in the domestic market. Also in such a situation, manufacturers tactically avoid buying, citing reasons like quality problems."

1 decade ago
Govt is trying to control inflation by reducing demand through interest rate hikes. Slow down is sure in such a situation .No need to crying on it
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