"….. As for the Indian steel industry, it has proved its mettle as the competitive supplier of steel in the overseas markets. Time has now come for the producers to concentrate on nurturing their domestic constituencies as their future growth will depend crucially on their ability to satisfy and sustain the huge latent steel consumption potential of the growing Indian economy …. "

A great sense of excitement has come to pervade the Indian economy in the recent months. The cautious optimism of last year has given way to a more definitive expectation of a sustained economic upturn. Analysts have detected signs of a cyclical turning point making way for an effective transition from an economic downswing to a virtuous cycle - ostensibly marking a beginning to a period of expansion in output, employment, investment and consumption. The economy has bounced back with a highly robust growth in Agriculture and a gradual but sustained increase in manufacturing as well as in service activities. The good showing by the agricultural sector paves the way for all round improvement, as that sector still remains the main motivator for growth in the secondary and tertiary sectors of the economy. The bumper harvest is expected to filter through to rural income and spending to boost industrial production further. The policy environment marked by a low interest regime and abundant liquidity coupled with a fairly stable and manageable price line and rising inflow of foreign capital should provide enough motive force for a steady increase in the GDP over a somewhat extended time horizon.

These improvements in some of the macro-economic fundamentals have impacted confidence levels of economic agents in a positive manner. This optimism is captured by the rise in the Business optimism indices calculated by leading analysts. To quote the Economic Times the Dun and Bradstreet Business optimism index rose by 12.6 per cent between the quarter ending December 2003 and the previous one. Three components of optimism index, viz., volume of sales, selling prices and number of employees recorded all time peaks. It is also reported that new orders remained stagnant while the optimism indices for net profit and inventory were lower than the peaks attained in the previous quarter. Consumer sentiment, on the other hand, is not so buoyant, with the ET-NFO Consumer Confidence Index falling marginally to 85 in December 2003 from 88 in September. However, the December levels are still significantly higher than the March and June figures of 75 and 79. Encouraged by the favourable expectations in different segments of the economy, some investment intentions have also been expressed in some quarters. If such investments take place within a short space of time, it will be the proverbial icing on the cake.

The possibilities of additional investment bring us to a somewhat uncomfortable issue of the gap between the so-called Prime Lending Rate (PLR) and the actual rate of interest at which the Banks and the Financial Institutions lend money to prospective investors. It is noted that although interest rates have declined sharply over the last couple of years, most of the reduction has been confined to the borrowing side. Majority of the Indian banks have not been equally prompt in effecting the cuts on their lending rates. It has been pointed out by observers that such conservatism and risk aversion on the part of the bankers can be traced to their intention of maintaining margins even as they try to cope with the NPA situation. While the credit-worthy blue chip companies desirous of investing can seek out other sources of low coast funds including overseas funds, this reluctance to lower lending rates will adversely hit investment in the small-scale sectors and the new entrepreneurs. This may slow down the pace of recovery in the short-run by constraining investments and capital formation in the economy even as the existing capacity reaches full utilization levels with a pronounced pick up in consumer spending. However, the dynamics of the capital market is expected to rectify this situation in the long run with the banks competing with other providers of finance for a fair share of the total business. The other source of disquiet arises from the international oil price. The recent weeks have seen crude price rise to around $35 per barrel in the international market. With India's dependence on imported crude, any further rise may upset the process of economic recovery, which seems to have gathered pace in the last two quarters. Here again, the opening up of the hydrocarbon sector will hopefully lead to better exploitation of our domestic sources of oil with the help of foreign investment. As a matter of fact, the recent finds of oil in Rajasthan under the aegis of Cairn's energy group is a case in point.

Last but not least, in these days of global integration and economic interdependence the pace at which our economy progresses depends crucially on the state of the world economy. It is true that the US, some parts of the EU and most notably the Japanese economy have shown signs of an early recovery, but even then a large part of the world economy is still grappling with problems of continuing slowdown.

To make matters more difficult, political uncertainties potent enough to upset all economic calculations - continue to dog the footsteps of the world community. As a matter of fact, the major growth drivers as of now are the Asian economies led by the People's Republic of China. But how long China's current growth momentum can be sustained is being debated by the economic analysts the world over. A large body of the experts believes that the Chinese economy is gradually getting overheated and that its still fragile financial sector may not be able to sustain growth at the current break neck pace and that the rate of unemployment and other structural problems may very soon result in a deceleration in the rate of growth of the economy.

However, for India the saving grace is the large size of our own domestic economy. The Indian industrial sector can hopefully draw sustenance from the large domestic markets, provided of course the policy measures ensure some redistribution of income to the lower income groups with higher propensities to consume. Of course, the basket of products would be different with the articles of mass consumption gaining ascendance but that itself would set in motion further rounds of income expansion. As for the Indian steel industry, it has proved its mettle as the competitive supplier of steel in the overseas markets. Time has now come for the producers to concentrate on nurturing their domestic constituencies as their future growth will depend crucially on their ability to satisfy and sustain the huge latent steel consumption potential of the growing Indian economy.

( J P Singh Joint Secretary, Ministry of Steel & Chairman, JPC)
(This is excerpted from JPC Bulletin Feb'04)