Course Name: B. Com.

H
Semester: II nd
Paper Code: BCOMH202
Title of the Paper: Indian Economy
Name of Faculty: Ms. Anju Singh
Designation: Assistant Professor

UNIT III; BCH 202: INDIAN ECONOMY

 Unit -3

PROBLEMS, PROSPECTS AND POSITION OF LARGE SCLAE INDUSTRIES

Iron and Steel industry

Overview

Steel and Cement are two great traditional indicators of state of the economy. Automobile is now
a global benchmark and of course its status also sums up the state of the steel industry. India is the
fourth largest producer of steel with a market value of US$ 57.8 bn in 2011, expected to reach US$
95.3 bn by 2016. Indian Steel industry has posted a CAGR growth of 10.7% over the last 10
years. It is a core industry for, as well as primary and secondary employment generation.

Prospects – all in the future (tense):

 The Indian steel industry is expected to register exponential growth in the future, riding on
increasing urbanization, and projected growth of infrastructure, automobile and real estate
sectors.

 India’s outlook has improved following the election of the new government which is
promising pro-business reforms. The government of India has set a target to triple Indian
steel production to 300 million tons by 2025.

 Key foreign players in the industry are investing in India which gives an optimistic feel for
the industry.

Investments and developments in the recent past:

 Japanese steel maker Daido Steel Company will pick up 10 per cent stake in Maharashtra-
based Sunflag Iron and Steel for around Rs 56 crore (US$ 9.09 million).

 Tata Steel has initiated talks with the Klesch Group, a Swiss Investment bank with interests
in commodities, to undertake “detailed due diligence and negotiations” for the possible sale
of its long steel business and associated distribution activities in Europe.
UNIT III; BCH 202: INDIAN ECONOMY
  Posco India, the subsidiary of the South Korea headquartered company, will invest US$ 20
million to set up a steel plant in Sanand in Ahmedabad. The plant will produce steel sheets
to meet demand from automobile companies that have made a hub in Sanand.

 Essar Steel has announced the commissioning of an integrated 6 MT iron ore pellet plant
near Paradip in Odisha. The factory is linked by a 253 km slurry pipeline with a facility which
is located at Odisha’s iron ore belt and can beneficiate low-grade ore.

Challenges/Problems:

 Delays in the government allocating sufficient iron ore blocks, regulatory approvals and
challenges in land acquisition have slowed many steel projects. Some of these hopefully get
addressed in the current quarter.

 Shift towards relatively lower steel demand growth in most of the heavy-weight economies
including China.

 Structural shifts in the Chinese market arising from over capacity coupled with weakening
prices are threatening the Indian players.

 As China threat was partly getting managed through the anti dumping duty route, we now
have Russian problem. Russia is a key producer of steel and as its currency has hit rock
bottom, the Indian market will again see very cheap imports.

 The franchisee route or the smaller producers perhaps are the biggest threat to the industry.
They are able to use the name of big players and use the re-cycle material.

The industry therefore faces external as well as internal threats. The manufacturing cost in India
remains high and with coal getting auctioned, it will only go up further. China and Russian
producers will keep flooding the market directly or indirectly with a helping hand from Indian
importers keen to make a quick buck even if the methods are unethical.

Some of the major problems faced by Indian iron and steel industry are as follows:
1. Capital:
Iron and steel industry requires large capital investment which a developing country like India
cannot afford.

UNIT III; BCH 202: INDIAN ECONOMY

Many of the public sector integrated steel plants have been established with the help of foreign
aid.

2. Lack of Technology:
Throughout the 1960s and upto the oil crisis in mid-1970s, Indian steel industry was characterised
by a high degree of technological efficiency. This technology was mainly from abroad. But during
the following two decades after the oil crisis, steep hike in energy costs and escalation of costs of
other inputs, reduced the margin of profit of the steel plants.

This resulted in lower levels of investment in technological developments. Consequently, the

industry lost its technology edge and is now way behind the advanced countries in this regard.
Material value productivity in India is still very low.

In Japan and Korea, less than 1.1 tonnes (and in several developed countries 1.05 tonnes) of crude
steel is required to produce a tonne of saleable steel. In India, the average is still high at 1.2 tonnes.
Improvement in the yield at each stage of production, particularly for value added products will
be more important in the coming years.

3. Low Productivity:
The per capita labour productivity in India is at 90-100 tonnes which is one of the lowest in the
world. The labour productivity in Japan, Korea and some other major steel producing countries is
about 600-700 tonnes per man per year.

At Gallatin Steel a mini mill in the U.S. there are less than 300 employees to produce 1.2 million
tonnes of hot rolled coils. A comparable facility in India employs 5,000 workers. Therefore, there
is an urgent need to increase the productivity which requires retraining and redevelopment of the
labour force.

4. Inefficiency of public sector units:

Most of the public sector units are plagued by inefficiency caused by heavy investment on social
overheads, poor labour relations, inefficient management, underutilisation of capacity, etc. This
hinders proper functioning of the steel plants and results in heavy losses.

UNIT III; BCH 202: INDIAN ECONOMY

5. Low potential utilisation:
The potential utilisation in iron and steel is very low. Rarely the potential utilisation exceeds 80
per cent. For example, Durgapur steel plant utilises only 50 per cent of its potential. This is caused
by several factors, like strikes, lockouts, scarcity of raw materials, energy crisis, inefficient
administration, etc.

6. Heavy demand:
Even at low per capita consumption rate, demand for iron and steel is
increasing with each passing day and large quantities of iron and steel are to be imported for
meeting the demands. Production has to be increased to save precious foreign exchange.

7. Shortage of metallurgical coal:

Although India has huge deposits of high grade iron ore, her coal reserves, especially high grade
cooking coal for smelting iron are limited. Many steel plants are forced to import metallurgical
coal. For example, steel plant at Vishakhapatnam has to import coal from Australia. Serious
thought is now being given to replace imported coal by natural gas from Krishna-Godavari basin.

8. Inferior quality of products:

Lack of modern technological and capital inputs and weak infrastructural facilities leads to a
process of steel making which is more time consuming, expensive and yields inferior variety of
goods. Such a situation forces us to import better quality steel from abroad. Thus there is urgent
need to improve the situation and take the country out of desperate position.

Position of Iron and Steel Industry

Steel industry and its associated mining and metallurgy sectors have seen a number of major
investments and developments in the recent past.
According to the data released by Department of Industrial Policy and Promotion (DIPP), the
Indian metallurgical industries attracted Foreign Direct Investments (FDI) to the tune of US$ 10.15
billion, respectively, in the period April 2000– December 2016.
Some of the major investments in the Indian steel industry are as follows:

UNIT III; BCH 202: INDIAN ECONOMY

 Tata Steel has signed an agreement to purchase a majority 51 per cent stake in Creative
Port Development (CPDPL), which has a concession agreement with the Odisha
government to develop a 10 million-tonnes-per-annum (MTPA) Subarnarekha port at
Chamukh village in Balasore district of Odisha.
 Tidfore Heavy Equipment Group, the China-based infrastructure giant, is looking to enter
the Indian market by signing an investment agreement worth US$ 150 million with Uttam
Galva Metallics, to expand its Wardha unit along with South Korean steel major Posco.
 ArcelorMittal SA is looking to set up a joint venture (JV) factory in India with state-owned
Steel Authority of India Ltd (SAIL), to manufacture high-end steel products which could
be used in defence and satellite industries.
 JSW Group plans to invest around Rs 10,000 crore (US$ 1.5 billion) at Salboni in West
Bengal to set up 1,320 Megawatt (MW) coal-based power plant, 4.8 million tonne cement
plant and paints factory over a period of next five to seven years.
 National Mineral Development Corporation (NMDC) has planned to invest Rs 40,000
crore (US$ 6 billion) in the next eight years to achieve mining capacity of 75 Million
Tonnes Per Annum (MTPA) by FY2018-19 and 100 MTPA by FY2021-22, compared to
48 MTPA current capacity.
 Arcelor Mittal, world’s leading steel maker, has agreed a joint venture with Steel Authority
of India Ltd (SAIL) to set up an automotive steel manufacturing facility in India.
 Iran has evinced interest in strengthening ties with India in the steel and mines sector, said
ambassador of the Islamic Republic of Iran, Mr Gholamreza Ansari in his conversation
with Minister of Steel and Mines, Mr Narendra Singh Tomar.
 Public sector mining giant NMDC Ltd will set up a greenfield 3-million tonne per annum
steel mill in Karnataka jointly with the state government at an estimated investment of Rs
18,000 crore (US$ 2.7 billion).
 JSW Steel has announced to add capacity to make its plant in Karnataka the largest at 20
MT by 2019.

UNIT III; BCH 202: INDIAN ECONOMY

Cotton and Textile Industry:

Problems of Cotton Textile Industry:

Although cotton textile is one of the most important industries of India, it suffers from many
problems. Some of the burning problems are briefly described as under:

1. Scarcity of Raw Cotton:

Indian cotton textile industry suffered a lot as a result of partition because most of the long staple
cotton growing areas went to Pakistan. Although much headway has been made to improve the
production of raw cotton, its supply has always fallen short of the demand. Consequently, much
of the long staple cotton requirements are met by resorting to imports.

2. Obsolete Machinery:
Most of the textile mills are old with obsolete machinery. This results in low productivity and
inferior quality. In the developed countries, the textile machinery installed even 10-15 years ago
has become outdated and obsolete, whereas in India about 60-75 per cent machinery is 25-30 years
old.

Only 18-20 per cent of the looms in India are automatic whereas percentage of such looms ranges
from cent per cent in Hong Kong and the USA., 99 per cent in Canada, 92 per cent in Sweden, 83
per cent in Norway, 76 per cent in Denmark, 70 per cent in Australia, 60 per cent in Pakistan and
45 per cent in China.

3. Erratic Power Supply:

Power supply to most cotton textile mills is erratic and inadequate which adversely affects the
production.

UNIT III; BCH 202: INDIAN ECONOMY

4. Low Productivity of Labour:
Labour productivity in India is extremely low as compared to some of the advanced countries. On
an average a worker in India handles about 2 looms as compared to 30 looms in Japan and 60
looms in the USA. If the productivity of an American worker is taken as 100, the corresponding
figure is 51 for U.K. 33 for Japan and only 13 for India.

5. Strikes:
Labour strikes are common in the industrial sector but cotton textile industry suffers a lot due to
frequent strikes by a labour force. The long drawn strike in 1980 dealt a severe below to the
organised sector. It took almost 23 years for the Government to realise this and introduce
legislation for encouraging the organised sector.

6. Stiff Competition:
Indian cotton mill industry has to face stiff competition from powerloom and handloom sector,
synthetic fibres and from products of other countries.

7. Sick Mills:
The above factors acting singly or in association with one another have resulted in many sick mills.
As many as 177 mills have been declared as sick mills. The National Textile Corporation set up in
1975 has been striving to avoid sick mills and has taken over the administration of 125 sick mills.
What is alarming is 483 mills have already been closed.

Exports:
India is a major exporter of cotton textiles. Cotton yarn, cloth and readymade garments form
important items of Indian exports. Indian garments are well known throughout the world for their
quality and design and are readily accepted in the world of fashion. Table 27.7 shows the export
trends of cotton textile products from India. It is clear that export of readymade garments has
increased tremendously since 1960-61.

Prospects

UNIT III; BCH 202: INDIAN ECONOMY

The textiles sector has witnessed a spurt in investment during the last five years. The industry
(including dyed and printed) attracted Foreign Direct Investment (FDI) worth US$ 2.41 billion
during April 2000 to December 2016.
Some of the major investments in the Indian textiles industry are as follows:

 Raymond has partnered with Khadi and Village Industries Commission (KVIC) to sell
Khadi-marked readymade garments and fabric in KVIC and Raymond outlets across India.
 Max Fashion, a part of Dubai based Landmark Group, plans to expand its sales network to
400 stores in 120 cities by investing Rs 400 crore (US$ 60 million) in the next 4 years.
 Trident Group, one of the leading manufacturers and exporters of terry towel, home textile,
yarn and paper in India, has entered into a partnership with French firm Lagardere Active
Group, to launch a premium range of home textiles under the renowned French lifestyle
brand Elle Décor in India.
 Raymond Group has signed a Memorandum of Understanding (MoU) with Maharashtra
government for setting up a textile manufacturing plant with an investment of Rs 1,400
crore (US$ 208.76 million) in Maharashtra’s Amravati district.
 Reliance Industries Ltd (RIL) plans to enter into a joint venture (JV) with China-based
Shandong Ruyi Science and Technology Group Co. The JV will leverage RIL's existing
textile business and distribution network in India and Ruyi's state-of-the-art technology and
its global reach.
 Giving Indian sarees a ‘green’ touch, Dupont has joined hands with RIL and Vipul Sarees
for use of its renewable fibre product Sorona to make an ‘environment-friendly’ version of
this ethnic ladies wear.
 Snapdeal has partnered with India Post to jointly work on bringing thousands of weavers
and artisans from Varanasi through its website. “This is an endeavour by Snapdeal and
India Post to empower local artisans, small and medium entrepreneurs to sustain their
livelihood by providing a platform to popularise their indigenous products,” said Mr Kunal
Bahl, CEO and Co-Founder, Snapdeal.
 Welspun India Ltd (WIL), part of the Welspun Group has unveiled its new spinning facility
at Anjar, Gujarat - the largest under one roof in India. The expansion project reflects the

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 ethos of the Government of Gujarat’s recent ‘Farm-Factory-Fabric-Fashion-Fore ign’
Textile Policy, which is aimed at strengthening the entire textile value-chain.
 The Indian textiles industry, currently estimated at around US$ 108 billion, is expected to
reach US$ 223 billion by 2021. The industry is the second largest employer after
agriculture, providing employment to over 45 million people directly and 60 million people
indirectly. The Indian Textile Industry contributes approximately 5 per cent to India’s
Gross Domestic Product (GDP), and 14 per cent to overall Index of Industrial Production
(IIP).
 The Indian textile industry has the potential to reach US$ 500 billion in size according to
a study by Wazir Advisors and PCI Xylenes & Polyester. The growth implies domestic
sales to rise to US$ 315 billion from currently US$ 68 billion. At the same time, exports
are implied to increase to US$ 185 billion from approximately US$ 41 billion currently.
 Indian exports of locally made retail and lifestyle products grew at a compound annual
growth rate (CAGR) of 10 per cent from 2013 to 2016, mainly led by bedding bath and
home decor products and textiles

Position

 The Indian textiles industry, currently estimated at around US$ 108 billion, is expected to
reach US$ 223 billion by 2021.

 The industry is the second largest employer after agriculture, providing employment to
over 45 million people directly and 60 million people indirectly.

 The Indian Textile Industry contributes approximately 5 per cent to India’s Gross Domestic
Product (GDP), and 14 per cent to overall Index of Industrial Production (IIP).
 The Indian textile industry has the potential to reach US$ 500 billion in size according to
a study by Wazir Advisors and PCI Xylenes & Polyester.
 The growth implies domestic sales to rise to US$ 315 billion from currently US$ 68 billion.
At the same time, exports are implied to increase to US$ 185 billion from approximately
US$ 41 billion currently.
UNIT III; BCH 202: INDIAN ECONOMY
  Indian exports of locally made retail and lifestyle products grew at a compound annual
growth rate (CAGR) of 10 per cent from 2013 to 2016, mainly led by bedding bath and
home decor products and textiles

Sugar Industry

Sugar is the second largest agro-based industry in India. The industry provides employment to
about two million skilled and semi-skilled workers besides those who are employed in ancillary
activities, mostly from rural areas. Though the industry contributes a lot to the socioeconomic
development of the nation, it is plagued with a number of problems such as cyclical fluctuations,
high support prices payable to farmers, lack of adequate working capital, partial decontrol and the
uncertain export outlook. Despite the problems, the industry has good growth potential due to
steady increase in sugar consumption, retail boom and diversification into areas such as power
generation and production of ethanol. In addition to this, strong possibilities exist for counter trade,
if the Government designs and develops sugar industry-oriented policies. With this background,
an attempt has been made to examine the problems and prospects of sugar industry in India.

Problems

Large Production: India has the largest area under sugar cane cultivation in the world. The yield
per hectare is extremely low (about 70 tons), when compared to Java, Hawaii, Peru, Rhodesia
(more than 150 tons per hectare). Even within the country, the yield is higher in South India than
in North India.

Faulty Distribution of Sugarcane: In India about one-third of the sugar cane production is
utilized for making Gur and khandsari. This causes shortage of raw material for the sugar mills.

UNIT III; BCH 202: INDIAN ECONOMY

Generate Unemployment: The sugar industry has a seasonal character and the crushing season
normally varies between 4 and 7 months in a year. Thus, the mill and the workers remain idle for
almost half of the year. This creates financial problems.

Recovery: The average rate of sugar recovery from the sugar cane is less than 10 per cent. This
recovery rate is low, when compared to other sugar producing areas like Java, Hawaii and
Australia, upto 14 per cent.

Small Production Capacity: Most of the sugar mills in our country are of small size with a
crushing capacity of about 1200 tons per day. Thus, most of them are not viable.

Outdated Technology: Most of the sugar mills in Uttar Pradesh and Bihar are more than 50 years
old. These mills are working with old and outdated machinery. Thus, low production reduces the
amount of profit and finally makes the unit sick.

High Production Cost: The cost of sugar production in India is one of the highest in the world.
This is due to high sugar cane cost, uneconomic production process, inefficient technology and
high taxes exercised by the state and the central governments.

By Product: The main by-products of the sugar industry are bagasse and molasses. The industry
faces problems in disposing these by-products, especially under pollution control devices.

Government Policy: The government policy, based on dual price system, discourages the
entrepreneurs to make investment for further growth and improvement.

Prospects

 Given a 14 per cent monsoon deficit and near-drought conditions (that adversely affected
cane crops in Maharashtra and Karnataka), India was estimated to produce 28 million
tonnes (MT) in the 2015-16 sugar season starting from October to September. However,
till March end, Indian sugar mills have produced 23.7 million tonnes, down 1.1 million
tonnes from last year. As on March 31, out of 366 sugar mills only 215 mills were
operating, with adverse implications for overall sugar production.

UNIT III; BCH 202: INDIAN ECONOMY

  With only 58 out of 135 mills operating, Maharashtra (largest producing State) has
produced 8. 2 MT against last year’s 9.36 MT. Another key producing State, Karnataka
has produced only 4.01 MT against 4.24 MT last year.

 According to revised government estimates and ISMA, sugar production for the current
year will be 25.6 MT and 26 MT, respectively, compared to 28.3 MT produced in 2014-15
— i.e. a shortfall of 2.7 to 2.3 MT.

 ISMA estimates that sugar stocks at the end of sugar season 2015-16 will be 7.5 MT
compared to 9.1 MT a year back. Sugar analysts opine that lower-than-average rainfall will
adversely affect sugarcane production in 2016-17 in major parts of Maharashtra and
Karnataka. But this shortage is likely to be well compensated by higher production from
UP and Tamil Nadu. UP has increased acreage under CO 0238 variety, which gives a much
higher yield and sugar recovery.

Export prospects
Besides production deficit, things started looking brighter for sugar export as international sugar
prices soared by over $50/tonne. The Maharashtra government has waived the 3 per cent tax on
cane purchase for mills that are able to export 12 per cent of their sugar output in the October
2015-September 2016 period.

However, the relative strengthening of the rupee vis-à-vis currencies of Brazilian real (against $)
has been playing spoilsport. Moreover, since September, domestic sugar prices surged by as high
as 35-40 per cent, thereby reducing the attractiveness of export markets. Since October 1, India
has shipped just 1.3 million tonnes of sugar against the target of 3.2 million tonnes. Thus, the
prospect of sugar exports in the near future is bleak. Government sources say that at the end of
2015-16 sugar season (October 2015-September 2016), it won’t be surprising if India’s sugar
export doesn’t cross the two MT mark.

International situation
Because of unfavourable weather condition, analysts have slashed their production estimates for
most sugar producing regions, including India, Thailand, EU and north-east Brazil.

UNIT III; BCH 202: INDIAN ECONOMY

A dry El Nino has reduced agricultural yield and sugar recoveries in Thailand, which is estimated
to produce 10.3 million tonnes in 2015-16, in the best case scenario — a shortage of over 6,00,000
tonnes. This trend is likely to continue in 2016-17.

Again, analysts have slashed their previous estimates for Chinese sugar production by over 3,
00,000 MT, from 9.5 MT to 9.2 MT. A substantial portion of India’s sugar exported to Myanmar
finds its way into China informally. Hardening domestic prices mean that there will be less export
of Indian sugar to China via Myanmar.

UNIT III; BCH 202: INDIAN ECONOMY