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Industry: Good year - Views on News from Equitymaster
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  • Feb 27, 2003

    Industry: Good year

    If last year was the annus horribilis for the industry, FY03 (fiscal ending March 03) has wiped out the frown and brought back the smile. On a back of a 5.8% growth in agricultural output in FY02 (fiscal ending March 02), the industry has performed significantly better than last year. The index of industrial production (IIP) grew by 5.3% between April to November’02 as compared to a weak 2.5% growth in corresponding period last year.

    Mining growth
    Growth rates Apr-Nov 01 Apr-Nov 02
    Mining and quarrying 0.7% 5.7%
    Manufacturing 2.6% 5.4%
    Electricity 2.5% 4.0%
    General 2.5% 5.3%

    The disappointing performance in FY02 (2.8% growth) was due to a drop in agricultural output in FY01. Since more than 2/3rds of the population is dependent on agriculture and allied activities for their livelihood, a bad year for agricultural translates into a weakness in private consumption. In India too, private consumption is largely responsible for industrial growth. However, agricultural sector alone was not responsible for the improvement in industrial performance. The external sector as well as public (Government) spending also contributed.

    The lag effect
    % Growth FY01 FY02
    Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
    Agriculture 1.80% 3.90% -0.80% -4.00% 1.10% 6.30% 7.60% 7.60%
    Industry 7.60% 6.40% 7.00% 4.10% 2.50% 2.70% 3.00% 3.40%

    The growth in demand from the external sector led to increased demand for the steel and textile industries. With the US Government imposing tariffs against other developed economies, the Indian steel industry saw a significant business opportunity and cashed in. This is evident from the fact that Indian steel industry saw a 16% growth in exports between April – November’02 compared to the corresponding period previous year. Further, with global demand for steel improving on the back of increased consumption by China, HRC (hot rolled coil) prices have shot up by as much as 55% between January to December 2002. The textiles sector also breathed a sigh of relief as the garments exports business showed considerable improvement. In both the cases, low cost of manufacturing (due to lower labour costs) makes India a preferred destination for production.

    The swift growth in cement industry was on the back of focused spending by the Government on infrastructure (roads). The speedy progress on the Golden Quadrilateral, and North-East and South-West corridor were largely responsible for growth in cement demand. The automobile industry too, saw strong growth in demand. While improved consumption and industrial activity fueled demand, another factor that was responsible for this demand spurt was the fall in financing costs. Seeing the weak industrial off take, banks have been aggressively lending to the retail sector. This has resulted into fierce competition and triggered a price war. Also, the soft interest rate policy adopted by the central bank (RBI) has made loans attractive for the individual. Consequently, demand for home and auto loans have sky rocketed.

    Industrial investments

    Perhaps the single most important concern regarding the Indian industry in recent times has been the lack of investments. There was however, an improvement on this front also. Use based IIP for capital goods grew by 9.9% between April - December 2002 as compared to 4.9% decline in the corresponding period previous year. The steep growth rate is due to a lower base. However, the non-food credit off take was a shade better than seen for the previous year. Year to date (April 2002 to Jan 11, 2003) the growth in off take was 11.4% (net of the merger of ICICI Bank and ICICI Limited) as compared to 9.1% for the corresponding period of the last fiscal. While lack of investment demand could be one of the reasons for sober credit off take by the industry, another reason could be companies using lower amount of debt to finance their operations. A study of 22 leading manufacturing companies by Equitymaster.com, has revealed that the debt to equity ratio declined from 1.2x in FY92 to 0.6x it FY02. (Read more)

    The number of industrial investment intentions filed through Industrial Entrepreneur Memoranda (IEMs) and the proposed investment (Rs 912 bn) was at similar levels in FY02. However, the Letter of Intents (LOIs) showed a sharp decline. The quantum of investments proposed through LOIs declined from Rs 13 bn in FY01 to Rs 6 bn in FY02.

    The FDI (foreign direct investments) into India showed a healthy growth of 10% between January to December 02. The figure increased to Rs 21 bn (US$ 4.3 bn) from Rs 19 bn (US$ 3.9 bn) in FY01. The number of FDI approvals came down sharply as most of the FDIs are now through the automatic route. The new economy sectors, telecommunications and electrical equipment (including software), had a 26.8% of share of the total FDIs inflows. Energy and transportation sector had another 21.2% share of the inflows.

    Improving environment

    Lower cost of capital, improved infrastructure and flexibility in labour laws are examples of some operating environment for the industry improving. However, in November 2002 the government enacted The Securitisation, Reconstruction of Financial Assets and Enforcement of Security Interest Bill. This act that gives the lending institutions the right to seize assets of defaulting entities is a significant step in the right direction. One of the key reasons for low economic growth has been the failure to channelise domestic savings into productive investments. The inability of the lending institutions to recover their loans successfully due to legal hassles in the past had partly given rise to this situation. Corrective steps are now being taken.

    Another important milestone has been the streamlining of the process of handling sick companies. The Sick Industrial Companies Act (SICA) will be repealed and be replaced by the Companies Act (second amendment) 2002. The functions of three entities, the company law board (CLB), Board For Industrial and Financial Reconstruction and High Courts (for winding up companies) will now be handled by a single entity National Company Law Tribunal (NCLT). The effort is to make the exit norms easier.

    The improvement in the industrial climate is also visible from the steep decline in number of lockouts and strikes in FY02 compared to FY01. The absolute terms the numbers declined from 674 to 321, a drop of 52% and the number of man days lost declined by 73% to 6 million man days.

    Small scale industries (SSIs)

    Despite continued de-reservation the number of SSIs continued to grow. The number of SSIs is expected to increase by 3.8% in FY02. Consequently, the output from the segment is expected to be Rs 7,420 bn (US$ 1.5 bn). This is expected to result in a 3.9% in employment growth in the sector.

    Many but too small...
    Rs bn FY01 FY02
    No of units (m) 3.4 3.6 3.8%
    Total production (Rs bn) 4,784.6 5,142.9 7.5%
    Average Turnover (Rs m) 1.4 1.4 3.6%
    Employment (m) 19.2 20.0 3.9%

    During FY03, the 52 items meant exclusively for the SSIs were de-reserved. This means that the corporates can now produce these goods. While there are concerns about the SSIs being able to compete with global might, there are many opportunities where India can be used as the manufacturing hub for the globe are missed. Thus, the Government as a conscious effort is taking steps to de-reserve as many industries as possible and at the same time make the small-scale industry as competitive as possible.

    Conclusion and outlook

    Thus, the improved industrial performance was due to a host of reasons like improved demand, Government spending, lower interest rates and improved demand from the external sector. However, low investments continue to be reasons for concern. With the significant steps taken in the recent years to make the operating environment for the industry more conducive, investments activity should pick up in the future.

    In the immediate future, the lower than normal monsoons in FY03 is likely to take a toll on agricultural output. According to CMIE, agricultural production is expected to decline by 10% for FY03 and the decline in agricultural output is estimated to be 4%. This will hurt industrial growth next year. The first signs of trouble were evident in the IIP numbers for the month of November. However, as the structural barriers fall and investments take place, the Indian industry is slowly shifting to higher gear.



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