Core sectors contract for sixth consecutive month
The output of the eight core sectors contracted in August 2020 by (-)8.5 per cent, recording the sixth consecutive month of negative growth. As the negative growth for July 2020 was revised to (-)8 per cent (earlier estimate: -9.6 per cent), the contraction in core sector has been marginally sharper than the previous month.
The growth in the output of the eight-core industries was (-)0.2 per cent in the corresponding month last year. On month-on-month (MoM) basis, the deterioration can be ascribed to localised lockdowns announced in some states which weighed on output partially. Barring coal and fertilizers, all the other sectors continue to record negative growth in output (YoY). Despite degrowth, sectors like natural gas and steel have seen an improvement from the previous month.
The final index for May 2020 has been revised lower to (-)21.4 per cent as against -21.9 per cent (provisional). For July 2020, output growth has been revised to -8 per cent from -9.6 per cent (prov) on account of revision in output of the steel sector. During April-August 2020, the core sector output has contracted by 17.8 per cent as against the 2.5 per cent growth during the same period of FY20, which can be ascribed to the Coronavirus pandemic induced nation-wide lockdown that brought production activities to a near standstill. All sectors barring fertilizers registered de-growth in industrial output during the first five month of FY21.
Coal production improved in August and has recorded growth of 3.6 per cent compared with (-)5.7 per cent in July. The partial resumption of industrial activities has led to increase in coal production.
Production of crude oil contracted for the 5th successive month in August 2020 by (-)6.3 per cent on account of technical mishaps such as unavailability of drilling equipment or installation of new platforms, closure of wells due to less offtake because of the COVID-19 coupled with limitations and restriction in movement of onshore field operations.
Natural gas production continues to contract by (-)9.5 per cent in August, recording a de-growth for 17th consecutive month. Fall in production can be mainly ascribed to restricted/no gas off take by consumers due to COVID-19 and shutdown at consumers' end. Environmental issues which resulted in bandhs/blockade by local people with issues associated with Baghjan well blast have also affected cumulative production.
Refinery production, having high weightage in eight core, contracted sharply by (-)19.1 per cent in August, compared with (-)13.9 per cent in July 2020. Increase in inventories and fall in demand has led to refiners trimming their capacity utilization thus resulting in a fall in overall refinery production. A few state-owned refiners were also planning to go for maintenance shutdown in order to remain afloat and protect margins. Capacity utilisation during August 20 was 77 per cent as compared with it being 106 per cent during August 19.
Output of steel sector declined by (-)6.3 per cent in August 2020, recording a fall for the sixth consecutive month. It can be ascribed to subdued construction activities owing to monsoon and lockdown restrictions, low demand from auto sector with high inventories and muted demand. However, there has been a sharp improvement since the April 2020 owing to resumption of construction activity.
Cement production continues to record double digit negative growth for half a year now. The de-growth in cement production was (-)14.6 per cent in August compared with (-)13.5 per cent in July 2020. Fall in demand for cement from housing and construction activities coupled with units operating at sub-par capacities along with staggered shifts has led to the fall in production. Heavy rains during the month have impacted domestic output.
Output of fertilizers grew to an eight-month high of 7.3 per cent in August compared with 6.9 per cent in July and the improvement can be ascribed to restocking activities undertaken by the manufactures in order to keep up with the sharp increase of fertilizer sales.
Electricity production fell by (-)2.7 per cent in August as against (-)2.5 per cent in July 2020 and (-)0.9 per cent in August 2019. Though the marginal fall (MoM) can be attributed to localised lockdowns in some states, there has been a sharp improvement from April 2020. This reflects resumption of industrial and business activity leading to pick up in commercial demand which again gets reflected in similar patterns witnessed in coal.
CARE Ratings' view
Unlocking of the Indian economy significantly after further relaxation of restrictions announced in September coupled with a low base effect will augur well for the growth in core sector in the next month. Given the relationship between core sector growth and IIP growth (i.e., 40 per cent weightage of core sectors in IIP), the latter may be expected to be in the region of -10-12 per cent.
ABOUT THE AUTHOR:
The article is authored by Sushant Hede, Associate Economist. He can be contacted at: Email: email@example.com | Tel: 91-22-68374348.
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