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Mahesh Vyas: India drives along the recovery autobahn

Mahesh Vyas  |  New Delhi 

The growth in automobile sales shows strong consumer demand while the doubling of cement capacity proves investment-spend is robust, says Mahesh Vyas

The scorching pace of growth in sales of two-wheelers and new capacity additions in cement should put to rest all arguments of India’s coupling with the US or the rest of the world in general. While the world is still debating its pulling back from the crisis, in India a quick recovery from the blip in October-December 2008 is now well established. During April-August 2009, two-wheeler sales grew by 15.1 per cent, car sales grew by 18.9 per cent and the cement industry added 16 million tonnes of additional capacity. The automobile and cement industries are back to their earlier levels of growth.

Many other industries have also quickly returned to their original robust growth rates. I have picked just automobiles and cement for discussion here because they represent two important parts of the economy. The growth in automobile sales implies a robust rise in consumer spending and the growth in cement capacities implies a robust investment demand.

Amazingly, the impact of the global crisis on even exports was much smaller than believed hitherto. The official data on exports had us believe that exports rose by only 3.4 per cent in 2008-09. But now we are being told that the growth was a far more respectable 12.2 per cent, although the official agencies cannot yet say what exactly the monthly growth rates behind these annual values were.

Any analysis based on official data nowadays is hazardous. No matter how good the models are, poor data inputs ensure poor inferences in the least, or misleading ones at the worst. The Index of Industrial Production (IIP) and the Wholesale Price Index (WPI) lost their respectability much earlier. Now the trade data is in question. Till the official statistical system is repaired (and I hope that happens soon), I rely essentially on CMIE’s firm-level and other private databases to understand the trends in the economy.

The Society of Indian Automobile Manufacturers (SIAM) is an efficient and reliable source of production and sales data. According to it, the growth in sales of two-wheelers has been accelerating since March 2009. In August 2009, it was at an enviable 21.6 per cent. Car sales grew by an even better 28 per cent in the same month after having clocked a growth of 29 per cent in July.

According to CMIE’s CapEx database, the automobile industry is expected to continue to grow at a hectic pace in the coming months as well. Companies are betting big time on the Indian markets. Maruti Suzuki commissioned a Rs 2,100 crore project in August 2009 to produce a lakh additional cars. Tata Motors will add a capacity of 2.5 lakh and Ford India will add another lakh cars by the end of March 2010. Total car manufacturing capacity is expected to go up by 5.1 lakh in 2009-10. This implies an impressive 19 per cent increase in capacity. Two wheeler producing capacity is projected to go up by 19.5 lakh or 17.4 per cent in the year. Investments worth Rs 8,900 crore will be commissioned in the cars and two-wheelers industries in 2009-10. Car companies had commissioned projects worth Rs 8,575 crore in 2008-09.

What is really important about these investments is that automobile manufacturers were not daunted at all by the global liquidity crisis that erupted in September 2008. Their faith in the Indian markets remained intact despite the worst crisis they faced in recent times. And, most of these investors are multinationals who experienced huge fall in demand elsewhere. Even the Tatas are a multinational that faced the heat of the global crisis and the wrath of a local militancy against its investments in West Bengal. Yet, its faith in India’s demand for cars remained intact.

The cement industry reflects a similar confidence in India’s growth story. The industry will add an additional capacity of 50 million tonnes in 2009-10. This is twice the capacity added last year, which itself was nearly a doubling over the 13 million tonnes added in its preceding year. Till around 2006-07, the additional capacity created in a year was between seven and eight million tonnes. So, we have seen a near-doubling of the capacity in this industry in each of the past three years. And this pace of growth was not interrupted by the global liquidity crisis.

There cannot be a more eloquent expression of confidence in the economy than putting up new capacities. And, this confidence is redeemed with profits. In spite of the hectic increase in capacities over the past three years, the cement industry commands a net profit margin of around 18 per cent. This makes cement almost as profitable as software that commands a net profit margin of about 21 per cent.

Capacity utilisation has also been quite high at around 85 per cent in spite of the runaway increase in capacities. This continued demand for cement over the past few years and its continuation over the past one year in particular since the global liquidity crisis implies that investments continue to grow at a robust pace. Real estate development and infrastructure development are the principal sources of demand for cement.

There is evidence that the real estate sector has started seeing a revival. Sales of real estate companies grew 30.7 per cent in the June 2009 quarter over their sales in the preceding quarter. Unitech reported a sale of 5,000 apartments in the June 2009 quarter compared to less than 400 in the March 2009 quarter. Disbursement of housing loans increased by Rs 3,138 crore in the quarter ended May 2009 compared to Rs 693 crore in the quarter ended February 2009.

If the demand for automobiles and housing continues to be robust within one year of the serious fear psychosis spread by the global crisis, then the underlying fundamentals of the Indian economy must be very robust. Growth, therefore, cannot be stalled merely by the temporary failure of the financial markets. But, it can be stalled by a mishandling of land acquisition for growth. We must ensure that growth is inclusive — of the people who are forced (or coaxed) to part with their land.

(The author is Managing Director and CEO, CMIE )  

First Published: Mon, September 28 2009. 00:42 IST