Core sectors contract by 15% in June 2020
Core sectors contract by 15% in June 2020
Economy & Market

Core sectors contract by 15% in June 2020

Vikas Damle

During the first quarter of FY21, core sectors contracted by 24.7 per cent compared with 3.4 per cent growth recorded in the corresponding quarter last year.

Core sectors' growth for June 2020 contracted by 15 per cent, better than the negative growth of 22 per cent recorded in May 2020. The improvement in negative growth in June reflects the relaxation of lockdown commencing from June 1. The core sector growth in June 2019 was also poor at 1.2 per cent. In the month of June 2020, barring fertilizers, all other industries have recorded a de-growth (yoy per cent).

During the first quarter of FY21, core sectors contracted by 24.7 per cent compared with 3.4 per cent growth recorded in the corresponding quarter last year. The contraction in core sector growth during the quarter reflects the impact of the nation-wide lockdown due to Covid-19 pandemic and the substantial production loss experienced by a number of industries.

Highlights for June:
Coal production growth contracted to 8-month low of 15.5 per cent in June 2020 compared with 2.9 per cent growth recorded in June 2019. This is mainly due to low off take of coal by power plants, high inventory pile up and low demand from user industries due to slow pick up in commercial and industrial activities. The negative growth (YoY) in June has been much steeper than May.
Production of crude oil continues to witness a contraction for 31th consecutive month. Crude oil production contracted by 6 per cent in June 2020 compared with 6.8 per cent in June 2019 owing to closure of wells due to lower off-take and restriction in movement or field operations.
Natural gas production recorded a negative growth of 12 per cent in June 2020, which is the 15th consecutive month of contraction. This can be ascribed to restricted gas off-take by consumers in onshore.
Refineries, which recorded a contraction for the 5th consecutive month saw production fall by 8.9 per cent in June 2020 owing to sub-par level capacity utilisation (85 per cent in June 2020 vs 99 per cent in June 2019).
The contraction in steel production is the highest amongst the 8-core industries at 33.8 per cent in June 2020 as against a growth of 10.8 per cent in June 2019 and can be attributed to subdued construction activities. However, there has been a notable improvement since April and May on account of large integrated steel players increasing production for exports.
Cement production contracted by 6.9 per cent in June 2020 compared with negative growth of 1.9 per cent last year. However, the degrowth has notably improved in June than April-May owing to easing of lockdown and pick-up in rural demand for cement. Cement players are still operating at sub-par levels and the onset of monsoon has also impacted production.
Fertilizer production has recorded a positive growth of 4.2 per cent in June 2020 compared with 1.6 per cent last year. This can be ascribed to higher demand at the onset of kharif season and increased operational activities due to relaxation of lockdown.
Electricity production, which recorded negative growth for 4th consecutive month, witnessed a contraction of 11 per cent in June 2020 as against a growth of 8.6 per cent last year. The contraction in June has eased from the previous two months as the pace of contraction of electricity production moderated with the improvement in electricity demand with the easing of the lockdown and resumption of economic activity in various regions.

Quarterly snapshot:
The impact of a nation-wide lockdown in April 2020 and its continuation in May and June 2020, albeit some relaxations reflects the negative growth seen in the core sector production numbers. Barring fertilizers, all sectors have recorded a steep contraction in Q1-FY21 compared with Q1-FY20.
Steel and cement industries recorded a sharp contraction of more than 30 per cent during the first quarter of FY21 owing to lower construction activities and reverse migration. Other industries like coal, natural gas, refinery and electricity have recorded a contraction of little more than 15 per cent.
The positive growth in fertilizers in Q1-FY21 can be ascribed to sharp increase in urea production and favorable monsoon forecast.
Crude oil production continues to witness contraction owing to ageing of existing fields and muted response from the industry to take up new projects.

CARE Ratings' view
Further relaxations of nation-wide lockdown in July could further improve the production activity and reduce the negative growth recorded in the 8-core sector. However, the surge in coronavirus cases leading to localized lockdown at the state level could weigh on production activity. IIP growth for June 2020 will continue to be negative but is likely to be better than April and May 2020. It could be in the range of -20-22 per cent for June 2020.

Courtesy: Core Sector: June 2020 by CARE Ratings

Footnote:
ABOUT THE AUTHOR:
Sushant Hede, Associate Economist
Email: sushant.hede@careratings.com | Tel: 91-22-68374348

Madan Sabnavis, Chief Economist
Email: madan.sabnavis@careratings.com | Tel: 91-22-68374433

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