India is expected to clock 7% GDP growth over the next few years. Till date growth has been driven by manufacturing as well as services sector. The challenge is to maintain growth at these levels. The key factor that can boost or limit economic growth is the state of physical infrastructure. By that we mean things like road connectivity, bridges and irrigation facility (to support agriculture growth). And what goes into the construction of these structures? The answer is cement. It is a key construction material. Steel is another important commodity. But we restrict our discussion to one commodity, cement.
Cement demand growth can provide a valuable insight into the growth of the construction activity. The same in turn will indicate dynamics of infrastructure development. Thus, this basic construction material plays a pivotal role in the growth of an economy.
Cement tracks GDP growth: In general it is said that the sector grows at the rate of 1.25 to 1.3 times of GDP. It holds true if one looks at the ratio over a two decade period. Annual average rate has been around this level. However, if one takes a look at the last decade or the recent upturn in cement cycle, the same does not hold true.
It's not that the sector growth has slowed down. Then why did sector report sluggish growth in this decade? There are two main reasons for this.
Economic slowdown: The thumb rule did not hold true during FY01, FY04, FY07 and FY08. The drop in ratio has come mainly during years of economic slowdown. This is the primary reason. The cement sector has outpaced economic growth during the period FY95 till fiscal year 2000. The IT slowdown witnessed during the beginning of this decade impacted overall growth. Towards the end of this decade global financial meltdown had an adverse effect. However, our economic growth is domestic driven. The slowdown impact did not last for long in either of the cases mentioned above.
GDP composition: Here we would like to make a note that there has been a structural shift in GDP composition over the years. This is also a factor that has impacted sector to GDP growth ratio. This is because economic growth reflected by GDP is boosted by other sectors. That includes other industries in the manufacturing sector as well growth of services sector. The growth of this previously agrarian economy is driven more these days by the services sector. The service sector makes up nearly 50% of GDP. It is followed by manufacturing sector that contribute approximately 30%. Agriculture accounts for the rest.
Going forward…: We expect cement sector to grow at 1.2 times of GDP. This is because of the need to build infrastructure. Improvement in physical state of infrastructure (roads, bridges, ports, warehouses and so on) is necessary. Further, there is still a significant amount of unfulfilled demand for dwelling units in the country. With increase in population, the demand for the same is set to grow. Thus, demand for the commodity is expected to be robust in the long run.
If policymakers and economists expect GDP to grow at 7% to 7.5%, cement sector is expected to grow at 9% to 10%. If the demand for this commodity does not pick up at this rate, economic growth may dwindle. This is because of improper state of the infrastructure that would create a hurdle in movement of goods and services like retailing, consumer durables, automobile etc.