Cement production grew by a robust 21.8%
The monthly index was higher by 1.1 per cent in comparison to the pre-pandemic level of July 2019. The core sector output for
June 2021 has been revised upwards from 8.9 per cent to 9.3 per cent. On a sequential basis, the core sector output grew by 5.4 per cent. This improvement can be viewed in the context of the slow resumption of economic activities across states with subsiding 2nd wave of Covid-19 towards the end of the first quarter of FY22.
There has been a broad-based y-o-y growth across all sectors except crude oil. Growth in cement and steel output backed by infrastructure push by the government have driven the growth during the month. Sequentially all sectors have witnessed an improvement over the previous month.
During the first four months of FY22, core sector witnessed double-digit growth of 21.2 per cent vis-à-vis -19.8 per cent in the corresponding period of the previous year. The cumulative index for the period so far in FY22 is lower by 2.8 per cent than the index for the corresponding period in FY20 prior to the onset of the pandemic.
This is indicative of the fact that though the economy has been showing signs of improvement it is still far from achieving the pre-pandemic levels of industry activity. Natural gas, steel and cement have witnessed double-digit growth purely on account of a base-effect phenomenon.
Coal production witnessed double-digit growth of 18.7 per cent in July 2021 as against a contraction of 5.7 per cent in July 2020. This growth in coal output can be ascribed to the revival in demand from the power sector amid easing of restrictions across states in July 2021.
Crude oil production recorded a 3.2 per cent contraction compared with -4.8 per cent in the same month last year. Less than planned production by government companies can be attributed to delays in inputs and installation of wellhead platforms on account of Covid-19, less than anticipated contribution from workover wells, drilling wells and old wells.
Production by Pvt/JVs companies was lower on a Y-o-Y basis due to injectivity and reservoir issues and delays in commencement of production.
Natural gas production was higher by 18.9 per cent in July 2021. This double-digit growth comes against a low base of -10.2 per cent in July 2020. This growth number masks the lower than anticipated natural gas production in government fields as well as by Pvt/JVs mainly on account of reservoir related issues, delays in well completion and commencement of gas production. Also, low upliftment of gas by major customers has dampened the natural gas output during the month.
Refinery production registered a growth of 6.7 per cent over negative growth of 13.8 in the same month last year. This improvement is indicative of the slow resumption of economic activities and resultant revival in demand coupled with higher exports to the gulf.
Fertilisers production grew at a subdued rate of 0.5 per cent compared with 6.9 per cent in July 2020. The growth in this sector can be attributed to sowing season demand and restocking of fertilisers ahead of the Rabi season which begins around October- November.
Steel output has not only witnessed a y-o-y growth of 9.3 per cent but it has also recorded a sequential improvement of 1.5 per cent over the previous month. Steel producing units diverted oxygen for medical purposes to meet the sudden surge in oxygen requirements by the healthcare sector during the initial months of FY22. The growth in steel output is indicative of the recovery from the challenges faced amid the 2nd wave of Covid-19. This sector is likely to get a boost from the several steps undertaken by the government to ramp up steel production.
Cement production grew by a robust 21.8 per cent against a low base of -13.4 per cent in the corresponding month last year. Momentum in construction activities and government spending on infrastructure has boosted the output in steel and cement sectors.
Electricity production grew at 9 per cent as against -2.4 per cent in July last year. On a monthly basis, electricity output rose by 7.2 per cent. This output growth is backed by revival in demand from the commercial sector as restrictions across states were eased in July’21. The healthy demand for electricity is likely to continue as the economy moves towards normalcy albeit at a gradual pace.
CARE Ratings’ View
As expected, the base effect phenomenon continues to hide the actual y-o-y growth in the core sectors. On a positive note, the m-o-m improvement in output of core sectors viewed alongside other crucial economic indicators such as the GST collections, e-way bills, and the manufacturing PMI (which was back in the expansion territory in July 2021) hint at signs of economic recovery.
The core sector output accounts for around 40 per cent weight in the IIP basket. On account of the strong core sector performance in July 2021, we expect the growth in index of industrial production to be in the range of 12 per cent-14 per cent.
Courtesy: CARE Ratings