Core sector growth turns negative in August in fresh concern
2 min read 30 Sep 2019, 05:23 PM ISTCoal, crude oil, natural gas, cement, and electricity recorded a negative growthThis data may spur the Reserve Bank of India to cut interest rates in its policy review later this week
PremiumNew Delhi: Growth worries for the government escalated, with the output of India’s eight infrastructure sectors contracting for the first time in more than four years in August.
The index of eight core infrastructure industries declined 0.5% during the month, according to government data released on Monday. Production in five sectors, including electricity and cement, shrank. The development indicates that the recovery seen in July may have been a blip, as feared by many analysts.
Output of coal (-8.6%), crude oil (-5.4%), natural gas (-3.9%), cement (-4.9%) and electricity (-2.9%) contracted in August, indicating a broad-based slowdown, while production of refinery products (2.6%), fertilizers (2.9%) and steel (5%) increased.
Although the contraction in cement output was partly on account of the high base of last year and monsoon rain, in conjunction with the moderation in growth of steel output, this does not bode well for construction activity. The weakness in electricity output was driven by a contraction of 3.5% in thermal electricity generation, in contrast to the moderately healthy expansion of 6.2% in July.
The latest macro data may also force the monetary policy committee (MPC) of the Reserve Bank of India to cut interest rates at its meeting later this week.
Data released last month showed the index of industrial production (IIP) grew 4.3% in July from a downward-revised 1.2% the previous month, bringing some cheer amid mounting economic gloom. Core sector constitutes about 40% of IIP.
Aditi Nayar, principal economist at ICRA Ltd, said the contraction in core sector growth in August confirmed that the modest pickup in IIP growth in July did not signal the start of an industrial recovery. “With the contraction in core sector output, auto production and non-oil merchandise exports, we expect IIP growth to print at a muted sub-1% in August. We continue to expect the MPC to cut the repo rate by 25 bps in the upcoming October 2019 policy review," she added.
Indian businesses have been battling a demand slowdown and liquidity crunch, resulting in economic growth rate cooling to a six-year low of 5% in the June quarter, while private consumption expenditure dropped to an 18-quarter low of 3.1%. While the government’s decision to cut the corporate tax rate is expected to boost sentiment, most analysts believe a recovery in either investment or consumption in the short run is unlikely.
Data separately released by the central bank showed non-food credit growth—a key indicator of consumption demand—decelerated to 9.8% in August from 12.4% a year ago.
