Infrastrucuture: Losing Momentum

Slower growth in five of the six core sectors pulled down the overall growth rate in the index of infrastructure industries to 5.3% in June 2007 against 7.7% in the year-ago period.

This is the slowest growth rate in the past year in the country, raising concerns about an overall economic slowdown.

This is a significant drop. On the supply side, the economy is dependent on the infrastructure industries so the June numbers are a cause of concern as it could have an impact on overall growth.

The highest dip in growth of production was in coal. This is not good news as a dip in coal production growth will have an impact on all the sectors, including steel and power and this is another area of concern. Coal production during June this year stood at 32.34 million tonnes.

Another crucial sector which saw a dip in production growth was crude petroleum, which recorded a negative growth of 1.8% against 1.2 %during the same month of the previous year. Data also showed that the growth in crude oil production has been slowing down since December 2006. The dip in coal production and crude petroleum shows the problem is on the supply side.

The only core infrastructure sector which showed healthy growth during June was electricity. Electricity generation registered a growth of 6.8% (provisional) in June 2007 compared with a 4.9% growth rate in June 2006. Electricity generation grew 8.3% (provisional) during April-June 2007-08 compared with 5.3% during the same period of 2006-07.

The slowdown in the infrastructure index follows a similar deceleration in industrial growth in June, which slipped into single digits of 9.8%, the lowest in the past three months, from 10.92% in May.

The slowdown in industrial growth is attributed to a dip in manufacturing production, which stood at 10.6% in June as against 11.7% in May.

The economy has shown signs of a moderate slowdown due to the monetary tightening measurers initiated by the Reserve Bank of India as well as the appreciation of rupee, which is impacting export growth.


The growth of the six infrastructure industries, with a combined weight of 26.7% in the index of industrial production (IIP), during the April-June quarter also decreased to 6.9% from 7.4% in the first quarter of 2006-07.

Crude petroleum production declined to 1.8% in June 2007 compared with a growth rate of 1.2% in June 2006. Crude petroleum production declined 0.7% during April-June 2007-08 compared with 0.2% during the same period of 2006-07.

Though petroleum refinery output did not decline, its growth slowed down to 9.8% in June 2007 from 10.5% in June 2006. However, petroleum refinery production registered a growth of 13.2% during April-June 2007-08 compared with 11.9% during the same period of last year.

Coal production growth plunged 1.3% in June 2007 compared with 11.8% in June 2006. Similarly, it fell drastically to 0.7% growth during April-June 2007-08 compared with an increase of 8.0% during the same period of 2006-07.

Cement production growth slowed down to 5.6% in June 2007 compared with 11.7% in June 2006. For April-June 2007-08, it slipped to 6.8% compared with an increase of 10.2% during the same period of 2006-07.

Also witnessing a decline in growth rate was finished (carbon) steel production at 5.6% in June 2007 compared with 10.2% in June 2006. Finished (carbon) steel production growth rate declined to 7.7% during April-June 2007-08 compared to an increase of 10.3% during the same period of 2006-07.

Led by roads and ports, power and telecom sectors, credit disbursement by banks to the infrastructure sector has grown in the last two years at 43 %and 36 per cent, respectively, according to industry chamber Assocham.

The chamber conducted a study covering financial years 2000 to 2007 on sectors such as iron and steel, construction, petroleum, power, telecommunication, roads and ports.

The study revealed that compounded growth in credit disbursement has been highest in the power sector at the rate of 58%, followed by roads and ports at 46%.

Lending to power as a share of infrastructure lending was 22% in 1998, which grew to more than half of the total infrastructure lending to Rs 57,863 crore in March 2006.

Outlook
The government may increase the credit exposure limits of banks to corporate groups taking up infrastructure projects. The finance ministry has asked the Reserve Bank of India to allow banks a bigger credit window for such companies, with the aim of helping credit flow to infrastructure sectors like roads, airports, power and ports.

At present, the credit exposure ceiling is 15% of the bank’s capital funds (equivalent to net worth) in case of a single borrower and 40% of capital funds in case of a borrower group. Borrowers belonging to a group may exceed the exposure norms of 40% of a bank’s capital funds by an additional 10% (a total of 50%), provided the additional credit exposure is on account of extension of credit to infrastructure projects whereas in the case of a single creditor, the limit can go up by 5%.