Macro Economy

Manufacturing sector stares at another challenging year

Suresh P Iyengar Mumbai | Updated on December 26, 2019 Published on December 26, 2019

Thanks to the Government’s stimulus package, the demand for steel and cement has shown signs of improvement in last two months

The manufacturing sector, which is just emerging out of an historic slowdown, is in for yet another challenging year in 2020, with the banking sector tightening credit flow, and the government cutting its spending on infrastructure projects.

While the Reserve Bank of India (RBI) claims that bank loan to corporates and individuals in November have grown 7.9 per cent year-on-year, it was up only 0.43 per cent to Rs 97.67 lakh crore between March and November. This is despite liquidity of Rs 2 lakh crore in the banking system, after series of repo rate cuts of up to 110 points by RBI since April.

Thanks to the Government’s stimulus package, the demand for steel and cement — a key indicator of economic activity — has shown signs of improvement in last two months, resulting in steel prices going up by ₹3,000 a tonne.

Given the firming steel prices globally and signs of green shoots in the domestic markets, companies are already contemplating a third price hike in as many months, and the price is expected to go up by ₹1,000 a tonne in January.

Seshagiri Rao, Joint Managing Director, JSW Steel, said that the demand in last two months were good largely due to restocking by dealers. Most of the dealers, who were waiting for the prices to fall further to restock suddenly started buying once they saw global prices moving up, he added.

Also read: Lack of credit, government expenditure cut has lead to slowdown, says JSW Steel’s Seshagiri Rao

Banking on sops and stimulus

The manufacturing industry is banking on the cut in corporate tax and lower lending rates to boost demand next year.

However, Rao said the transmission of the multiple repo rate cuts by banks to corporates and end-consumers is still not happening. Banks clearly do not want to lend to highly leveraged sectors such as steel, and the economic revival will sustain only if the credit flow improves, he added.

The demand for steel from the auto sector — one of the largest consumers of steel — has improved, even though auto sales slipped eight per cent in November, after a recovery during the festival season.

Hit by an unprecedented slowdown, automobile sales in July dropped 19 per cent, recording its worst-ever fall in 19 years. Similarly, the passenger vehicle sales growth also plunged to 19-year-low, and recorded 31 per cent fall to 200,790 units in July.

Amid slowing demand, the auto industry is gearing up to meet Bharat Stage-VI norms from April. The government had extended a helping hand by allowing all BS-IV vehicles purchased up to March 2020 to be operational till their period of registration. It also postponed the proposed increase in the one-time vehicle registration fee to June.

The demand for white goods may also hit a bump, due to credit constrain and high interest rate. The job losses across various sectors on the back of the economic slowdown may also have its impact on white good sales in the coming year.

The bleak prospects of Micro, Small and Medium Enterprises (MSME), which usually depend on large croporates, is reflected in the growing stress in the Pradhan Mantri Mudra Yojana. As of March, 2019, Scheduled Commercial Banks and Regional Rural Banks have disbursed ₹6.04 lakh crore Mudra loans since the inception of the scheme. Of the total lending, 2.96 per cent or about Rs 17,252 crore had turned non-performing assets.

Infrastructure woes

Cement demand witnessed a significant fall in 2019 due to muted infrastructure activities, heavy rainfalls and liquidity crunch.

The demand for cement is expected to recover gradually, and softer input costs will help cement companies in the near term.

The infrastructure sector has witnessed tremendous pressure as the award for new projects remained muted across major segments such as roads and railways. The execution of previous orders was also impacted due to extended and heavy monsoon across major parts of the country, along with a delay in land acquisition.

Alok Deora, Senior Analyst, Yes Securities, said that the award of government projects are expected to pick up significantly from the current levels which would provide revenue growth visibility for 2022 and beyond.

Published on December 26, 2019
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