The missing element is agriculture, but we are poised for sustained growth in manufacturing, says Mahesh Vyas
The manufacturing sector dominated investments in the mid-1990s. But, its share fell sharply thereafter — from 42 per cent in June 1996 to 17 per cent in December 2002. The flurry of investments soon after liberalisation in the early 1990s led to some excess capacities. A sharp rise in interest rates around 1996-97 led to many of the investments of the mid-1990s turning into non-performing assets of banks since these were largely bank-funded. As a result, further investments in manufacturing declined.
While liberalisation had spurred private sector investments in manufacturing, it failed to attract private sector investments in infrastructure building. Investments in infrastructure took off only after the government funded these. The CapEx database shows this in the rise in investments in the transport services sectors. These are investments in roads, railways, airports and marine ports.
The dramatic improvement in the quality of roads in India as also the airports and other transport infrastructure is the direct result of the sustained increase in investments seen the CapEx database.
After eight years of decline, investments in manufacturing bottomed out in 2002 and took off again after 2004. The building up of infrastructure — both in transport services and in power generation — helped private sector entrepreneurs to look again at investment opportunities. Easy money and a resurgence in domestic demand led to a quick rise in investments in manufacturing. Soon private sector investments spread out to a new industry — construction. It also increased its exposure to electricity. This led to a decline in the share of manufacturing.
The result of these shifts in the pattern of investments is that by March 2009, India had a well-balanced portfolio of investments compared to anytime in the past. This makes India better poised to exploit the opportunities available in its natural endowments, its talent pool and the latent domestic demand.
We are not, anymore, bypassing the opportunities in manufacturing as was feared — and even advocated by some earlier. Today, investments in the power sector top the list. This along with the large investments in the transport services sectors ensures that at least the infrastructural bottlenecks that threaten to hold India’s growth would not get worse in the future. There is a greater probability of infrastructure improving and facilitating a higher growth rate.
The missing element in the investment story is agriculture. Investments in irrigation account for a meagre 2.4 per cent of total investments. Given the low productivity in agriculture, it is imperative that the impediments to investments in agriculture are removed to draw private investments.
Corporatisation of agriculture is worth exploring.
The sustained investment in the power sector is expected to yield handsome results in 2009-10. According to the CapEx database, 11,513 Mw of additional capacity is scheduled to be added during the year. Given that the implementation of projects often get delayed, we believe that only about 7,730 Mw would actually get commissioned during the year. Yet, this would be more than twice the 3,454 Mw of capacity added in 2008-09 and similarly much higher than the capacities added in any of the preceding three years.
The crude oil, natural gas and petroleum refining industries saw some large new capacities coming on stream in 2008-09. This included Reliance’s petroleum refinery at Jamnagar. Some of the investments, like the KG-Basin natural gas project, spill over into 2009-10. Besides, new capacity additions are expected to come on stream in 2009-10 from ONGC and Cairn India as well. The combination of the projects commissioned in 2008-09 and 2009-10 in the hydrocarbons industry are large by historical standards.
The sustained increase in power generation capacity, the large investments in the petroleum sector and investments in the other infrastructure industries are expected to have a positive impact upon the manufacturing sectors. We discuss a few of the large manufacturing sectors that would see some increases in productive capacities in 2009-10.
* The cement industry is expected to see a third consecutive year of big increase in capacities in 2009-10. Until recently, capacity addition was about 7-8 million tonnes a year. Then, in 2007-08, the industry added 32 million tonnes of new capacities. This was followed by another 27 million tonnes in 2008-09. Now according the CapEx database, in 2009-10, a record 33 million tonnes of additional cement capacity would be added. In spite of the aggressive build-up of new capacities, capacity utilisation has not sagged. Demand has been robust as is seen in the resilience of cement prices.
* The delay in the commissioning of JSW’s steel plant, first in September and then in December 2008 had raised worries of a slowing down of the investments boom. However, the company commissioned its plant in February 2009 and raised the capacity of its Salem plant to 7.8 million tonnes. This is scheduled to be raised to 10 million tonnes by September 2010. It would then be the largest steel plant at a single location. 4.8 million tonnes of additional steel capacity was commissioned in 2008-09. In 2009-10, a further 6 million tonnes of new steel capacity would be added. This would expand outstanding steel capacity by 9 per cent.
* Aluminium capacity is projected to rise by a whopping 29 per cent in 2009-10 as Nalco is expected to complete its Rs 5,000-crore Phase II project at Angul by October 2009. Aluminium capacity had increased by 2.5 lakh tonnes in 2008-09. According to the CapEx database, it would increase by a further 4.15 lakh tonnes in 2009-10.
* The automobiles sector has seen a surprisingly quick recovery from the hit it suffered in October-December 2008. Production, sales and export statistics for February, March and April point towards an exceptionally robust turnaround. This ensures that the industry would continue to invest in its expansion plans. In 2009-10, we expect the productive capacity for commercial vehicles to increase by 1.5 lakh vehicles (implying a 17 per cent hike), passenger cars to increase by 1.1 lakh vehicles (up 4.5 per cent) and two-wheelers by 13.4 lakh numbers (up 10.4 per cent).
Given the general gloom around the world, these increases in manufacturing capacities by Indian companies is exceptional. More importantly, the well-diversified portfolio of investments will ensure that the growth we see today would be sustained over the medium term.
The author is Managing Director and CEO, Centre for Monitoring Indian Economy
