Home >News >India >Core sector output shrinks in June, but at a slower pace

India’s eight infrastructure sectors contracted sharply for the fourth straight month in June, though at a slower pace than in May, signalling an uneven return to normal manufacturing activity since the lifting of the nationwide lockdown on 1 June.

Data released by the industry department showed that in June, the core sector which constitutes 40% of the index of industrial production (IIP) shrunk 15%, against 22% in May, with cement (-6.9%), refinery products (-8.9%) and steel (-33.8%) recording an improvement from the previous month, even as electricity (-11%), natural gas (-12%) and crude oil (-6%) displayed muted pickup.

Graphic: Paras Jain/Mint
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Graphic: Paras Jain/Mint

The International Monetary Fund (IMF) on Wednesday said high-frequency indicators signal plateauing of economic activity in India as the positive impact from unlock is not as strong as the negative impact of the lockdown. It urged the government to urgently contain the spread of the coronavirus pandemic on a priority to make economic recovery sustainable.

The IMF has estimated Indian economy to contract by 4.5% in FY21, while Goldman Sachs expected the June quarter to be the worst, with GDP shrinking by 45% as business activity came to a standstill for at least two months due to stringent lockdown measures.

Madan Sabnavis, chief economist, Care Ratings, said electricity production remaining negative reflects low industrial activity as commercial demand has been subdued given the massive adoption of work-from-home practices, and only partly running of factories. “Low crude oil prices and low demand for fuel also kept production and imports subdued," he added.

Even with a moderation in the pace of growth in June, fertilizers (4.2%) remained the only sector to record positive growth for the second month in a row, in line with the ample rainfall and a brisk start to kharif sowing in June.

Steel remained the worst performing sector for the second month in a row in June. “The differential performance of cement and steel suggest that construction activity has resumed at a faster pace in rural areas relative to urban areas, and that production of consumer durables continues to lag the recovery seen in other sectors," said Aditi Nayar, principal economist, Icra Ratings. While Nayar expected IIP to contract 15-20%, Sabnavis projects 20-22% contraction in June, data for which will be released on 12 August.

Data separately released by the Controller General of Accounts (CGA) showed the Centre exhausted 83.2% of fiscal deficit in the first quarter (April-June) of FY21 against 61.4% during the same period a year ago.

Nayar said taking into account the fiscal support announced by the government under the “Aatmanirbhar Bharat Abhiyan" and the expenditure management measures that have been put in place, Centre’s fiscal deficit may surge to 13 trillion in FY21 from the budgeted level of 8 trillion. “This anticipated fiscal slippage, even in our base case scenario, exceeds the extent by which the Centre’s market borrowings have already been increased."

In last few weeks, government officials have signalled that the announcement of a new fiscal stimulus package is only a matter of time. Finance Commission chairman N.K. Singh last week said the Centre has kept its options open and will act at an appropriate time.

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