Except coal, all other core sectors witness decline
In March 2020, the production in the eight core industries contracted at a fastest pace in the past eight years. Eight core sector output contracted by considerable 6.5 per cent after registering persistent growth in the past 4 months. In March 2019, the production in these industries had grown by 5.8 per cent and had expanded by 7.1 per cent In February. The growth for February 2020 has been revised upwards from 5.5 per cent (prov.) to 7.1 per cent (first revision).
The eight core industries comprise 40.27 per cent of the weight included in the index of industrial production (IIP) basket. During the month barring coal all eight sectors have witnessed contractions due to the coronavirus-led lockdown announced on March 24 that led to closure of activities in most industries.
In FY20, the production in the eight core industries expanded at lacklustre 0.6 per cent, which is a lowest growth seen in the past eight years. Contraction in output in four industries namely coal, crude oil, natural gas and cement and subdued growth in remaining four industries has led to lower growth during the year.
Contraction during the month is on account of broad based declined across sectors barring coal.
Coal production grew by 4 per cent lower than the 9.1 per cent growth seen in March 2019. The growth has been supported by ramped up production by one of the main players in the industry. However, reduction in demand for power, high inventories lying with power generation companies and labour shortages faced by companies impacted the output.
In March 2020, Crude oil production contracted successively for more than 2 years (28 months) by 5.5 per cent due to the decline in fields operated by private players along with decline in crude oil prices.
The production of the natural gas too has declined in the past one year and in March it further declined at a double digit pace of 15.2 per cent. It can be ascribed to decline in consumer demand due to the nationwide lockdown, which shut transport and industrial activity.
Steel production has declined at a fastest pace since the inception of 2011-12 series. In March 2020, it declined by 13 per cent as against 6.3 per cent growth in the same month a year ago. Steel production in March 2020 was impacted by the seven days nationwide lockdown during the month which led to halt in production by most user industries including automobile and construction.
The production of cement too contracted at a fastest rate in the past 8 years. It contracted by -24.7 per cent in March 2020 as against 7.8 per cent in March 2019 due to high base effect coupled with the halt in production due to the nationwide government imposed lockdown.
Electricity production has declined by 7.2 per cent compared with 11.7 per cent growth last month. The contraction in electricity generation in March'20 can be attributed to the fall in electricity demand from the industrial and commercial sector (which together account for nearly 50 per cent of the country's electricity demand) on account of the lockdown. Electricity demand fell by nearly 25 per cent during the second half of March'20. Power generation from both the renewable energy sources and conventional sources have declined during the month. Power generation has been impacted by availability of inputs as well as labour due to the disruption caused by the pandemic.
During the year, four sectors witnessed decline in production namely coal, crude oil, natural gas and cement whereas the remaining four sectors have increase in output during the year though lower than a year ago level barring fertilizers that grew at highest rate in the past 4 years.
Coal production contracted for the first time in the past 8 year. Year on year, the production of coal declined by 0.5 per cent as against the 7.4 per cent growth seen a year ago. Coal production remained low during the first eight months of FY20 due to the extended rainfall and labour strikes at one of the largest coal mining company in the country. Post the withdrawal of monsoon, the production picked up having grown between 6-11 per cent during December 2019 to February 2020 before moderating in March 2020.
Crude oil production contracted for the past 8 years in a row. However, at -5.9 per cent, it was the highest decline in the crude oil production compared with the previous 8 years. Loss of output in old and aging fields weighed on overall production during the year. In addition, sustained decline in the crude oil prices and high inventories globally have weighed on the domestic production during the year.
Fertilizers production grew at 4 year high rate of 2.7 per cent in FY20, after 3 consecutive years of less than 1 per cent growth. Strong double digit growth in Q3-FY20 led to such positive number for full year FY20. Improvement in demand due to a good southwest monsoon which resulted into higher sowing and a decline in prices of the commodity has aided the increase in production. While area covered in the Kharif season remained at similar levels as previous year, areasown in the Rabi season saw a pick up and thereby boosted fertilizer output for the year.
When compared with the growth in other sectors in FY20, steel production growth was highest among all at 4.2 per cent. However, there has been sustained decline in the steel production since FY17 as muted construction activities on account of delayed monsoons, high real estate inventories and slowdown in the automobile sector lowering demand for steel led to lower production in this segment.
After registering considerable double digit growth by 13.3 per cent in FY19, the production of cement declined by 0.8 per cent in FY20. Weakness in housing demand, prolonged rains in many parts of the country and decline in demand from the infrastructure segment due to lack of funding and halting/ temporary stoppage of state projects following change in government post state elections has affected the production of cement in the domestic markets.
Electricity generation grew at the slowest pace in 7 years in FY20 at 1 per cent growth. There was a sustained decline in domestic power generation during June û November'19 that can be partly attributed to the extended monsoons which reduced electricity demand from the agriculture sector as well as households (cooler temperatures).
CARE Ratings' View
On the premise of the contraction seen in the eight core sector in March 2020, the industrial output is also expected to contract in the month of March 2020. The coronavirus led lockdown was extended till May 3rd, which has brought industrial activities to a near standstill in whole April 2020. Despite some ease in industrial activities has been permitted by the government post April 20th, the production activities have remained muted with labour shortages and other issues. As result, in April 2020 as well we may see a further contraction in eight core sectors and in the industrial output.
Courtesy: CARE Ratings' Core Sector - March 2020 and FY20 report
ABOUT THE AUTHORS:
Economics Team: Kavita Chacko and Dr Rucha Ranadive
Industry Research Team: Urvisha Jagaseth, Vahishta Unwalla and Rashmi Rawat
Madan Sabnavis, Chief Economist.
Disclaimer: This report is prepared by CARE Ratings Ltd. 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.