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What India's core sector data foretells

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The rise in August core sector output to 11.6%, increase in production of steel and cement, and several macroeconomic indicators returning to green, have made analysts positive about an economic revival. Mint scans the state of India’s recovering economy

The rise in August core sector output to 11.6%, increase in production of steel and cement, and several macroeconomic indicators returning to green, have made analysts positive about an economic revival. Mint scans the state of India’s recovering economy

What do the August numbers show?

The eight core sectors—refinery products, electricity, steel, coal, crude oil, natural gas, cement and fertilizers—comprise 40.27% of the Index of Industrial Production (IIP). According to data, core sector output rose by 11.6% in August 2021 over August 2020. Coal and natural gas production increased by 20.6%, refinery products by 9.1%, steel by 5.1%, cement by 36.2%, and electricity generation by 15.3%, while fertilizers and crude oil fell by 3.1% and 2.3%, respectively. Interestingly, August 2021 and July 2021 output was 3.9% and 1.1% higher than pre-covid levels.

What is the Index of Industrial Production?

The IIP is the key economic indicator for the manufacturing sector and measures the changes in the volume of industrial production. The index primarily comprises of manufacturing, mining, and electricity sectors with the weightage of 77.63%, 14.37%, and 7.99%, respectively. Its current base year is FY12. July numbers showed the IIP increasing by 11.5% on year. While the index was slightly below pre-covid levels, given the overall growth momentum and core sector output for August increasing for the second successive month, it might be possible to state that economic activity is on the recovery path.

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What has been the trend for core sector output and IIP?

While data for 2018 showed both core sector output and the IIP being in the positive range, 2019 recorded a decline, especially in August-October. The 2020 lockdown resulted in both largely declining; however, there was an upward trend in September 2020. Due to localized curbs, the adverse impact of second covid-19 wave was largely moderated.

How important is core sector output?

Rising core sector output reflects greater production and economic activity. Higher core sector output and the IIP have a multiplier effect on economic growth and lift other end-use and allied sectors such as automobiles, real estate, and construction. Sectors such as steel, cement, electricity, and fertilizers are strong lead indicators of economic revival. Higher production leads to increased income in the hands of people and higher demand, boosting output and economic activity and setting a virtuous cycle in motion.

Why is core sector the barometer?

The core sector is the real anchor supporting the rest of the sectors, with strong forward and backward linkages. Demand for core sector products is derived from the final user sectors which, in turn, are consequent upon the buying power of the general public. Improving core sector output also indicates growth in infrastructure, housing, and agriculture. In brief, trends in the core sector could be taken as a definite signal about the state of the economy.

Jagadish Shettigar and Pooja Misra are faculty members at BIMTECH.

 

 

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