Engineering: Better growth ahead, but nowhere near the best
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The engineering industry, and the capital goods sector in particular, have a feast when the nation-building process is on an upswing. But whenever a society or polity inadvertently grinds the process of nation-building to a halt, the engineering industry faces a famine.
Across the globe, India not excluded, the political community seems to have forgotten that the population is growing and that it is growing more in the developing world. To meet the needs of that growing population, and satiating their ever-increasing demands, capacity-building in the social, agricultural, infrastructure, industrial and service sectors has to continue irrespective of economic cycles. Barring China, which has possibly created surplus capacity, every country in the developing world is bereft of sufficiency in virtually every sector.
In India, with a clear mandate bestowed by the electorate to improve development and end corruption, the Narendra Modi government started very well. Between the government and the regulator, inflation—which made the common man poorer by the day—was brought under control. A visible move was made to cut interest rates to kickstart the investment cycle. The bureaucracy was energized with a clear direction from the Make in India policy. Providential help came from the slide in crude prices, which brought the current account deficit to a respectable 1.8%. We also have a prime minister who has elevated the visibility of ‘Brand India’.
All this brought back growth. Though part of it was attributable to the way GDP (gross domestic product) was calculated, in comparison to a bruised Europe, China, Russia, Japan and West Asia, we are almost unscathed and better placed.
One may wonder then about why us, “the argumentative Indians”, are complaining. Is it that Indians do not want to be happy? No. The truth lies elsewhere. We have not been able to adequately capitalize on our strengths. One reason for this is that we did not behave like a unified nation or even a federal nation. Because of that, we have lost one year. I hope we will not lose another.
For the engineering industry, it hasn’t entirely been a lost year. Sectors such as food, food processing, pharmaceuticals, beverages, textiles, auto, auto ancillaries, consumer durables and light engineering continued to create capacities. Both brownfield as well as greenfield projects are getting implemented in these sectors. The renewable energy sector, especially the solar photovoltaic segment, is witnessing unprecedented growth, supported by substantially reduced capital costs and supportive and pragmatic government policies.
The laggards are the cement, steel, non-ferrous metallurgy, oil and gas, fertilizer, and power sectors. Among these, the first three are justified in not adding new capacities since their capacity utilization is languishing between 60% and 70%. Unless capacity utilization moves closer to 90%, new capacity addition cannot be justified.
However, inaction in the other three sectors in initiating capacity building will certainly have serious ramifications in the medium term. India’s demand for traction oil and petrochemicals is growing at a fast pace. With a growing population, agriculture has to keep pace with food demand. We import fertilizer, putting pressure on our foreign currency wallet. We continue to deny power to both the industry and the population by resorting to power cuts (in many parts for extended hours) rather than building power plants.
Our energy sensitivity for future growth will almost be on par with GDP growth. This will translate into an average 7-8% demand growth annually. We need the central and state governments to set up more power plants without any further delay as they take at least four to five years from concept to completion.
Traction is already building in the road, railways and defence sectors, with a focus on driving capacity creation and modernization. We are expecting these initiatives to translate into orders and then to execution at an accelerated pace in 2016. The sheer sizes of the projects already announced, and those that are in the pipeline, should give a boost to the order book of the engineering industry both in the organized and SME (small and medium enterprise) sectors.
We have witnessed a noticeable retardation in our engineering exports in the recent past. Depressed economies across the world are going slow in building capacities. A lot more non-tariff barriers are indirectly getting erected to protect domestic manufacturers by many of India’s target export markets. As much as India is promoting domestic manufacturing, many potential and substantive markets in South-east Asia, West Asia and South America are also demanding domestic manufacturing and value-addition to reduce hard currency outflow and push job creation.
The unprecedented depreciation of the euro and the Japanese yen in the past year has allowed companies from those geographies re-emerge as credible competition to Indian exporters. To combat this challenge, we look forward to export incentives on par with China, Japan and South Korea and an extension of long-term credit facilities for our international customers.
The only levers that are going to help the Indian engineering industry get through the rough weather is innovation, operational excellence and cost containment coupled with help from the governance. Having seen the worst, the engineering and capital goods industry expects a better year ahead. But still nowhere close to the boom years of 2003-10.
M.S. Unnikrishnan is MD & CEO, Thermax Ltd