NEW DELHI : The bad news on the Indian economy just got worse. The core infrastructure industries’ output—measuring a basket of eight sectors accounting for two-fifth of India’s factory output—contracted to the lowest in at least 14 years, pointing to a deepening industrial slowdown.

The gauge contracted by 5.2% in September from a growth of 4.3% in the year- ago period, according to data released by the commerce and industry ministry on Thursday.

The development strengthens the case for the central bank to continue its monetary stimulus, experts said. With inflation likely to remain within the central bank’s target range in the near term, another rate cut in the December monetary policy review is a near certainty, said Sunil Kumar Sinha, principal economist at India Ratings.

“Such a low growth in core sector industries has not been witnessed so far in either the 2011-12 base or the 2004-05 base series. This clearly indicates the severity of the ongoing industrial slowdown," said Sinha.

Core Shock
Core Shock

Barring fertilizers, where the output improved by 5.4% in September, the other seven infrastructure industries witnessed a contraction. Coal was the worst performer on account of an extended monsoon, a surge in renewable energy supply and labour issues at state-run Coal India Ltd. Output contracted by 20.5% in September, compared to an 8.6% decline in the previous month and a 6.4% expansion in the year-ago period. Coal also accounts for a substantial share of the freight moved by the Indian Railways and the country’s power generation capacity. Of India’s installed capacity of 360 gigawatts, 54% is coal-fuelled.

Data showed that production of key primary sources of energy such as crude oil and coal as well as refined petroleum products and electricity took a beating.

Energy consumption, especially electricity and refinery products, is usually linked to overall demand in the economy. State-run Indian Oil Corp. Ltd (IOC) on Thursday reported an 83% drop in its second quarter profit at 564 crore on the back of a slump in refinery margins and inventory losses.

IOC chairman Sanjiv Singh said diesel consumption grew by around 1% in the first six months of the current fiscal. This comes amid the worst slump in almost two decades in the automobile sector.

Earlier this month, official data showed that industrial output had contracted 1.1% in August, its worst performance in 26 months. India’s economic growth rate had slowed down to a more than five-year low of 5% in the June quarter.

The Narendra Modi administration has taken a series of steps to reverse the trend, including a cut in the corporate tax rate in September from 30% to 22% for companies not availing of any tax breaks and from 25% to 15% for new manufacturers.

On a cumulative basis for the first half of the fiscal too, the performance of the eight core sectors remained dismal, with a growth of 1.3% as against 5.5% during the corresponding period a year ago.

Experts agreed that seven out of the eight core industries showing a contraction was a worrying signal, but said the trend could be reversed in a few months.

“Electricity demand is linked to factory output. An improvement in industrial production will lead to a turnaround in electricity generation," said Debasish Mishra, partner at Deloitte India. “We expect a reversal of this trend by the middle of next year on account of the steps the government has taken so far."

Data showed that crude oil production contracted 5.4% in September in continuation of the trend for the last one year, while natural gas output contracted for the sixth month on the trot in September to 4.9%. Electricity output contracted 3.7% in September, its second straight month of contraction. Cement production contracted 2.1% in September, indicating the continued weakness in construction activities. Refinery products contracted 6.7% in September after a 2.6% growth in the previous month. Fertilizer output showed steady growth for the fourth month to 5.4% in September. Steel output marginally shrank by 0.3% in September from a growth of 5.1% in the previous month.

India’s coal requirement is forecast to go up to 1,123 million tonnes (mt) by 2023 from the present level of around 700mt, in line with the government’s push to raise natural resources production and boost economic growth.

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