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NATIONAL LAW SCHOOL OF INDIA UNIVERSITY, Bangalore.

ECONOMICS II PROJECT
CORE SECTOR GROWTH IN INDIA Issues

Submitted by: Harshitha Dammu I.D No. 2056

TABLE OF CONTENTS 1. 2. 3. 4. 5. 6. Introduction. 3 Understanding the Core sector.. 4 Performance of The Core sector 8 The Indian coal industry10 Conclusion12 References13

Introduction The core sector of India is a vital component of our Economy. It consists of a group of eight industries that are broadly related to the extraction and use of natural resources. The sector includes mining (coal, iron, and petroleum products), electricity and manufacturing (oil refinery, cement, steel, and fertilizers). The reason this sector is so vital to the economy is because it accounts for about 38% of overall industrial production and roughly 27% of the nations GDP. Not just that, its growth has strong correlations with t he level of investment activity in the economy which is essential for future economic growth. Also because the sectors output makes up for such a large share of the National output, a fall in overall core industrial output leads to supply bottlenecks in the economy and sometimes forces the Government to import from abroad which is a drag on the economy. Within the core sector, the coal industrys output is the deciding factor of overall output of the sector as major industries such as Electricity, steel and Iron are heavily dependent on coal as one of their inputs of production. These industries especially, are the backbone of our economy and a poor performance by them in a period can severely affect the economy. Hence, in order to achieve higher levels of economic growth, it is essential for the coal industry to perform well and increase production.

Measuring Growth The Index of Industrial Production is the leading indicator of industrial performance in the country. It is compiled on a monthly basis and the current IIP series is aggregated into three broad groups of mining, manufacturing and electricity. The IIP as an index shows both level of production and growth.

Understanding the Sector A brief overview As stated earlier, the core sector of India comprises the mining, manufacturing and electricity industries. It is imperative to understand the nature and contribution of these industries to the economy to get a better answer as to why they are collectively called as the core sector. Mining: Mining is the process of extracting minerals from the earth. Minerals are an essential requirement of any economy and very fortunately India is endowed with rich mineral resources. The process of extraction of the minerals is generally undertaken by the Government, public-sector companies or MNCs. In the case of coal, mines are predominantly public companies. However, The Indian Government, in the recent past has been opening up the sector to usher in private investment and infuse funds, technology and managerial expertise. Indian industry is heavily dependent on coal, iron, copper, petroleum etc., as they are important natural resources that are required to manufacture other goods and products. This means that the manufacturing Industry is dependent on the mining industry for inputs of production. Minerals are also exported extensively and this contributes to Indias international trade relations. The highest mineral production comes from four major industries i.e. Petroleum, coal, Iron ore and Natural gas all of which constitute the core sector. Coal is the most mined with about 80% of mining activities focused on extracting and processing it, while the rest 20% is in various other metals such as gold, copper, iron and lead. But as a whole, the mining industry, on an average contributes about 2.5% of the GDP annually and it has a combined contribution of 17.3% in the overall industrial production. Demand for minerals is expected to grow in the near future due to increasing levels of consumption, infrastructure development and growth of the economy. The mining industry according to a few analysts, is the one with the maximum potential for growth.

From figure 2.1, it can be seen that the mining industry has been experiencing negative growth rate since 2010-11. Possible reasons could include regulations, policies and growing environmental concerns. Some issues that the industry is facing and the possible solutions will be discussed later in the paper.

Mining Statistics: Index of Mineral Production1 (Base 2004-05 = 100)

Fig 2.1

Manufacturing: Manufacturing industries utilize inputs of production including natural resources and process them into finished consumer goods or intermediary goods. The manufacturing industries that specifically make up the core sector are oil refinery, cement, steel (alloy + non-alloy) and fertilizers. For this reason, the manufacturing industry is heavily dependent on the mining industry for raw material. If the mining industrial output were to be high, then it can be safely assumed that the manufacturing would perform well too in that period. The manufacturing industry in India is the sector that contributes the highest to Industrial production at about 75% and second largest contributor to GDP after the services sector. In terms of employment, in the year 2011-12, it employed about 12% of Indias labour force. A key characteristic of Indian manufacturing industry is that it also caters largely to the international market. In the fiscal year 2012-13, manufacturing exports grew at a CAGR rate of 19.6%. This doesnt mean that the industry doesnt cater to domestic demand. In fact domestic consumption is the key driving force of the industry and with strong GDP growth likely to continue, demand appears to be persistent. Growth in this sector has been matching the strong pace in overall GDP growth over the past few years.2
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Source: Corporate Catalyst India, link available at http://www.cci.in/pdfs/surveys-reports/Mineral-andMining-Industry-in-India.pdf. 2 Source: Union Budget 2013-14, link available at http://indiabudget.nic.in/es2012-13/echap-09.pdf.

Fig 2.2

Figure 2.2 maps the growth of the manufacturing sector from fiscal years 2005-12. One way of measuring growth of an industry is to calculate the value of the overall output of the Industry in the market with respect to prices. Going by that, the manufacturing industry has nearly doubled in size in a period of seven years. Contribution to GDP although on a declining trend in the recent past, is still significantly high at 15.3%. It must however be noted that strong growth in the industry has been accompanied by a change in the nature of the sector from a public sector dominated to a more privatised one. This is in an effort to set India on a path to becoming a Global manufacturing hub. The manufacturing industrys importance to the global economy is all set to increase further mainly because of supply side advantages, policy initiatives and private sectors efforts. Electricity: Electricity in this era has gained the importance of a basic human need. For a nation, it is a crucial infrastructure component upon which socio - economic development depends. Electricity in adequate supply and globally competitive prices is the essential requirement for economic growth.

Fig 2.3

Figure 2.3 is an indicator of the reliance of the electricity industry on coal for power generation. The growth in electricity consumption from 2000-12 has been slower than the GDP growth rate. There could be two reasons behind it fast growth of the services sector or efficiency in of electricity consumption. However, a growth in the manufacturing industry is expected to lead to a rise in electricity demand at a much faster rate. As coal is a non-renewable source of energy, of late, renewable sources of energy are being considered, like wind, solar energy etc., for power generation due to several environmental concerns. While in future, the dependence of the electricity industry on coal for power generation might drastically down, at present and for quite some time to come, coal will still be the main source of energy for the sector. Indias electricity sector is the 5th largest in the world. The sheer size of the market and the returns available on investment capital offers tremendous potential for investing companies.

Performance of the Sector 2000-2013

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3.1 Figure 3.1 maps the index of industrial production for all 8 core sector industries. Base year 2004-05 = 100. Electricity with a weight of 10.316 is the highest contributor to the IIP. From 2007-13, it has been continuously doing well with Apr-Sep 2014 quarter recording a high of 163.6. Cement, Steel and Refinery products continue to do well and together with electricity are the stable industries to see a steady growth. Fertilizers and Natural Gas although have increased industrial production, in the Apr-Sep -14 quarter it just dragged down total industrial production and growth rate to a minimal 2.5%.

Fig

3.2 Base year 2004-05 = 100. Figure 3.2 shows the compounded annual growth rate (CAGR) for each of the 8 core sector industries.

Source: Ministry of Commerce and Industry, GOI, link available at http://www.eaindustry.nic.in/eight_core_infra/Eight_Infra.pdf. 4 Id.

On the whole, the growth rate of the sector has slowed down tremendously with only steel and electricity industries increasing their growth rate. Natural Gas industry can be seen as the worst performer for it has been experiencing negative growth rate since 2011-12. Refinery products industry is the biggest loser in terms of growth rate from 27% to a mere 5.3%. Overall, the poor performance hit the IIP and growth rate has come down to 3.2%. This could be one of the reasons for the recent economic slowdown. Coal which is one of the biggest contributors to IIP, is used as an input by electricity, cement, steel and iron industries mainly. Its performance is crucial for the dependent sectors as well as the economy as a whole. Coal is the starting point and the key to sustainable industrial growth and economic growth is hence the coal sector. The chapter deals with the coal sector in specificity, the issues its facing and possible solutions to them.

The Indian Coal Industry

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As stated earlier, mining is an important economic activity which contributes significantly to Indian economy at an average of 2.2-2.5% of the total GDP. In terms of the industrys GDP, it is 10%. Coal is the most mined mineral in the world and in India. It is crucial for several reasons. The demand for electricity is always rising especially in a developing country like India. Also the growing global steel production requires a huge supply coal as raw material. Hence, the demand for coal is always on the rising side. For India, energy security is of utmost importance yet it is a growing challenge. Coal production is expected to grow at high rates and this would definitely widen the demand supply gap. In recent years, the Indian Government took several initiatives such as coal block allocation and stake sales in PSUs in order to boost production and investment in the coal industry. India has the fifth largest coal reserves in the world. The electricity, iron and steel; and cement industries are the largest consumers of coal in India.

Demand and Supply of Coal: From 2006-07 to 2011-12, Indias coal production has increased phenomenally by 28.5%431 MT to 554 MT. The demand for coal, on the other hand, has grown at a CAGR of more than 7% in the last decade to reach 600 MT. On an average the demand-supply gap is 98MT. Most of the deficit is imported from other countries. Demand Supply Scenario5

Fig 4.1

Coal Industry Structure:

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Source: India Energy Book, 2012 (World Energy Council, Indian Member Committee)

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Coal Industry in India is Government owned monopoly. Over 90% of coal production comes from Government owned mines like CIL and Singareni Collieries. Although the policy for captive mining was introduced in 1993, private investment hasnt made much progress in captive coal blocks allocation by the Government. In the Fiscal year, roughly 200 coal blocks were allocated to private players but only 30 have commenced production. The combined production from these was a meagre 36.3 MT as against a target of 104 MT. The reasons for this could be many including land acquisition and R&R, availability of Geological data, environmental clearances, etc.

Importance of Coal for the Steel and Cement Industries: Coal is an essential raw material for the production of Steel. There is a strong correlation between availability of coking coal (the type of coal needed for steel production), production of steel in the country and per capita steel consumption. In India, there is acute shortage of coking coal just about 15% of overall coal reserves. In order to increase steel production by 105 MT, a corresponding requirement of 67.2 MT of coking coal is needed. As for the cement industry, India is the second largest producer in the world. Large amounts of energy is required to produce cement and coal is one of the energy sources. For every 900g of cement produce, 450g of coal is consumed. The cement industry is the third largest consumer of coal after electricity and steel, as mentioned earlier. Coal is used over oil and gas as prices of petroleum products fluctuate frequently and are usually high priced. The dependence on coal by these two industries is therefore very high.

Challenges in the Coal industry: In spite of having the fifth largest reserves of coal, India is still not able to meet its domestic demand. More and more coal is being imported every year and according to projections, by the end of the 12th Five year plan, Indias coal import requirement could reach 200 MT. 1. Production Constraints Around 180 forestry proposals are awaiting clearances. If all of them were to be approved, coal production could more than double its output.6 Most coal projects have been halted or delayed due to R&R issues and strict land acquisition rules. Bottlenecks in domestic coal production. Lack of proper road connectivity, infrastructure.

Source: Coal India Limited, link available at http://www.coalindia.in/Performance.aspx?tab=0.

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2. Demand and Supply The long term demand for coal mainly comes from the end use sectors that include the electricity, iron, steel and cement industries. Most of these industries require coking coal as raw material which is a very scarce coal resource. Shortages in coal is met by captive coal block production and imports. However, import of coal is mainly dependant on availability of coal in the global market, increasing competitiveness and coal prices. Conclusion: The core sector is heavily dependent on the coal industry. The coal industry itself is suffering from regulatory issues, operational issues, sustainability, infrastructure problems and fiscal issues. Unless these issues are tackled by the government by way of policy reforms and increased private investment, the core sector doesnt have a bright future.

References-

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MOSPI RBI CII Ministry of Commerce and Industry NSSO