The Hindu Business Line : Ripple effect of economic growth

With commodities outperforming other asset classes, they are seen attracting investor interest, not only in the developed economies, but in India too.

THERE MAY be spin-offs for commodities from construction activity.

Under-investment in infrastructure and its negative effect on the pace of economic growth is well recognised. Huge investments planned in housing construction and infrastructure development sector are expected to create huge demand for a wide range of commodities including steel, base metals, cement, wood and many others. It is said that when a house is built, it creates market for as many as 250 commodities.

A new concept that is now engaging the attention of policy-makers and investors is the Special Economic Zones (SEZ). As many as 550 SEZs have been proposed so far. Notwithstanding the ongoing controversy over the desirability, economic importance and fragmentation of SEZs, huge investments are expected to flow into establishing scores of SEZs, which again translates into utilisation of a range of commodities.

Dependence on imports

Energy is an integral part of India's growth story and a critical input for rapid economic development. Currently, the country is energy-deficient. There is a serious shortage of oil and gas as also electricity. Over the last four years, India's petroleum consumption grew by a modest 2.7 per cent a year. Given the Eleventh Plan projection of growth, the consumption demand for petroleum is expected to increase at a faster clip. Therefore, there is a strong upside potential consumption growth. However, the country will continue to depend on imports, whose volumes are set to expand. From 112 million tonnes in 2005-06, the petroleum consumption is forecast to rise to 135 million tonnes by 2012. On current reckoning, however, the target for 2012 may well be achieved by 2010 itself, experts assert. Similarly, by 2012, the net crude oil import is projected to reach 110 million tonnes; but this estimate seems a little conservative and the import need may exceed 110 million tonnes two years before the end of the the Eleventh Plan.

Focus on rural infrastructure

The growth potential and investment opportunities strongly suggest a huge expansion in commodity production, consumption and import.

In addition, there is the Government's Bharat Nirman programme that envisages flow of large sums of money into a series of activities focussing on the rural areas. The scheme aims to build rural infrastructure — roads, housing, water supply and electrification — besides creating additional irrigation capacity for 10 million hectares.

These activities will set off a virtuous cycle of employment and income generation in the rural areas which, in turn, will generate additional demand for food, clothing, housing and energy.

Therefore, expansion of commodities trade is inevitable. The emerging economic interest in the commodities sector is palpable. Because commodities often outperform other asset classes, they are seen attracting huge investor interest, not only in the developed economies, but in India too, of late. So, what are the major commodities of strong economic interest to the country? Here's a short indicative list.

Industrial: Iron ore, steel, cement;

Base metals: Aluminium, copper, nickel, zinc: tin, lead;

Precious metals: Gold and silver;

Food: Grains (fine and coarse cereals); sugar, oilseeds and veg-oils;

Fibres: Cotton, jute, silk, synthetic fibres;

Energy: Oil and gas, electricity, bio-fuels.

(To be continued)

Please send suggestions and queries to younginvestor@thehindu.co.in, or The Research Bureau, The Hindu Business Line, 859-860, Anna Salai, Chennai-600002.

More Stories on : Investments | Young Investor | Commodities

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page