Base effect hides monthly decline

Base effect hides monthly decline

Steel and cement sector witnessed a growth of 59.3 per cent and 7.9 per cent (YoY) respectively, which reflects the capex push provided by the Central and State governments. The decline in case of cement and steel production is mainly due to impact of the record surge in Covid-19 cases in May 2021 and the associated lockdowns on construction activity.

Steel and cement sector witnessed a growth of 59.3 per cent and 7.9 per cent (YoY) respectively, which reflects the capex push provided by the Central and State governments. The decline in case of cement and steel production is mainly due to impact of the record surge in Covid-19 cases in May 2021 and the associated lockdowns on construction activity.

The Eight core sector should be read with caution again as the favourable base effect is again at play for the third consecutive month. In May 2021, core sector output rose by 16.8 per cent as against a contraction of 21.4 per cent in May 2020. On a month on month level comparison, there has been a marginal decline of 3.7 per cent which reflects the impact of the second wave of the Covid-19 pandemic and the associated lockdowns on business activities. One should note that May has been characterised by lockdowns of varied nature in both FY21 and FY22. The localised lockdowns during May’21 did have a bearing on output of the 8-core sector to some extent while the double-digit growth can be chiefly ascribed to the low growth number in May’2020. There has been an upward revision in the core sector growth data for April’21 to 60.9 per cent (previous estimate: 56 per cent).

The double-digit Y-O-Y growth has been primarily driven strong growth registered in steel, natural gas and refinery products. Month-on-month improvement has been registered in case of fertilisers (ahead of kharif season), natural gas and coal production. The monthly index for May’21 is still 6.1 per cent lower than the pre-pandemic index of February’20 and 8.2 per cent lower than May’2019 (the year prior to the pandemic). So far in FY22, the core sector output has witnessed a growth of 35.8 per cent compared with a de-growth of 29.4 per cent in the corresponding month last year but this purely a baseeffect phenomenon. There could be support from government capex as the fiscal numbers for this period show higher outlay on roads.

Key highlights

Coal production was higher by 6.9 per cent in May 2021 as against -14.1 per cent in May 2021. Despite the 2nd wave of the COVID19 pandemic disrupting business activities during the month, there has been a month-on-month improvement of 3.1 per cent in coal production on the back of revival in demand from the power sector.

Crude oil production fell by 6.3 per cent in May 2021, registering the 42nd consecutive monthly decline. The decline in production can be ascribed to adverse climatic conditions created by cyclone Tauktae, which hit the Indian west coast coupled with less than planned contribution from workover wells, drilling wells and old wells. The overall production has also been lower owing to lower consumer demand, infectivity issues in few wells, workovers and water knockouts.

Natural gas production rose by 20.1 per cent in May’2021 compared with contraction of 16.7 per cent in May’2020 mainly due to higher output from the PSC fields. However, production in government fields were low due to reduced gas production in Western Offshore due to cyclone Taukate, delay in commencement of gas production and less offtake by consumers due to Covid-19 issues. Natural gas production by Pvt/JVs companies in the PSC (production sharing contracts) regime has almost tripled on a YoY basis. This is due to increased contributions from D-34 field of KG DWN 98/3 and wells from satellite cluster.

Refinery production rose by 15.3 per cent in May’21 as against a de-growth of 21.3 per cent in May’2020. There has however been a month-on-month decline of 4.6 per cent reflective of lower consumer demand amidst the localised lockdowns during the 2nd wave of the Covid-19 pandemic. Products that witnessed a rise in production were high speed diesel, petrol, liquefied petroleum gas, aviation turbine fuel and petcoke, while fuel oil and kerosene saw a fall in output during this month.

Fertiliser production declined to a 14-month low of 9.6 per cent in May 2021 compared with a high base of 7.5 per cent in May 2020. The m-o-m growth of 16.1 per cent can be ascribed fertilizer manufacturing companies increasing their production in May over April in anticipation of good demand ahead of the kharif sowing season. Along with this, the Centre increased the subsidy on fertilizers in mid-May after fertilizer producers announced their plans of increasing prices due to a surge in international feedstock prices. This hike in subsidies assuaged manufacturers’ worries around a fall in demand from farmers. This is likely to have supported production too.

Steel and cement registered a growth of 59.3 per cent and 7.9 per cent (YoY) respectively which does reflect the capex push provided by the governments at both Centre and State level along with a low base effect. The m-o-m decline in case of cement and steel production highlights the impact of the record surge in Covid-19 cases in May 2021 and the associated lockdowns on construction activity. Labour shortages due to reverse migration also had a bearing on construction activities during May’2021.

Electricity generation rose by 7.3 per cent in May 2021 as against a low base of 14.8 per cent in May 2020. However, there has been a month-on-month decline of 7.1 per cent as states imposed lockdowns to rein in the devastating effect of the second wave of the Covid-19 pandemic. The higher usage of electricity in residential locations during the summer season limited the monthly moderation to some extent.

CARE Ratings’ View

There has been a dip in the core sector index for May’2021 compared with the previous month which reflects the impact of the localised lockdowns on business activity. However, as economic activities, especially in the industrial segment were not significantly affected in June 2021, output of the core sector will witness an improvement. There has been a strong push for capex from the Government which will drive steel and cement while the advent of the kharif season will drive fertilizer production. The impact of the base-effect will continue in the next few months but will fade away subsequently. The IIP for the month of May’2021 could range between 20-30 per cent though one should not read much into it.

Courtesy: CARE Ratings

ABOUT THE AUTHOR:

The article is authored by Sushant Hede, Associate Economist. He can be contacted on: Email: sushant.hede@careratings.com | Tel: 91-22-6837 4348

Disclaimer: This report is prepared by CARE Ratings Limited. CARE Ratings has taken utmost care to ensure accuracy and objectivity while developing this report based on information available in public domain. However, neither the accuracy nor completeness of information contained in this report is guaranteed. CARE Ratings is not responsible for any errors or omissions in analysis / inferences / views or for results obtained from the use of information contained in this report and especially states that CARE Ratings has no financial liability whatsoever to the user of this report.

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