Falling core sector growth bodes ill for factory output

Growth in the core sector, comprising eight infrastructure sectors, slumped to a nine-month low in August, signalling a coming slowdown in industrial activity.

Except for crude oil and natural gas, all sectors posted growth. Growth in the eight sectors—coal, crude, natural gas, refinery products, fertilizers, cement, steel, and electricity—slowed for the third straight month in August to 3.3% in August from 4.5% in July, data released by the ministry of commerce and industry showed on Friday. Only fertilizers posted double-digit growth in output.

Economists expect industrial production to remain muted in the coming months, given that the eight core industries hold 40.27% weight in the Index of Industrial Production (IIP). “A disaggregated picture signals some slowdown in real terms. Cement and steel have witnessed low growth rates, indicative of lower infrastructure activity levels. We may expect industrial growth to be 4-5% for August,” said Madan Sabnavis, chief economist, Bank of Baroda. He added that core sector growth for the month had been influenced partly by the statistical base effect of 12.2% growth last year.

Sunil Kumar Sinha, principal economist, India Ratings and Research, said the ongoing industrial recovery is still weak as the core sector output is only 3.5% higher than the pre-covid level (February 2020). “In fact, the coal and cement sector output even in August are trailing the pre-covid level. Even the ongoing momentum of industrial activity, which is captured by the seasonally adjusted month-on-month growth, continues to be weak,” Sinha said.

He added that based on seasonally adjusted data, core sector output in August shows a contraction of 0.9% over July. “Worryingly, core sector output has now declined sequentially for four consecutive months, based on the seasonally adjusted data,” he added.

Coal production growth slowed to 7.6% in August after four months of double-digit growth and 11.4% growth in July but was still among the better-performing sectors. Electricity output slowed to 0.9% in August compared to 2.3% last month and 16% in the corresponding month last year. “Return to normalcy in coal production is positive for the economy which was under stress in April and May following the Ukraine war where there was a shortage of coal,” said Sabnavis.

Crude oil contracted for the third straight month, declining by 3.3% in August against 3.8% in July. Natural gas output declined for a second straight month at 0.9% in August compared to 0.3% in July. Steel output grew by 2.2% from 6% growth in August. Cement and fertilizers grew by 1.8% and 11.9%, respectively, in August.

“Fertilizer production was upbeat more in preparation for rabi sowing, which will start from next month,” said Sabnavis.