Output of Eight Core Industries Contracts 5% in September, May Hurt Q2 GDP growth

The data released by the commerce and industry ministry showed production in coal, crude oil, natural gas, refinery products, steel, cement, and electricity declined last month.

New Delhi: Output in the core sector fell by a record 5.2% in September with production in seven of the eight industries declining, portending slow growth in the second quarter of this financial year too.

The sector, which has over 40% weight in the index of industrial production (IIP), grew by just 1.3% in the first half of 2019-20 against 5.5% in the corresponding period of the previous financial year.

Gross domestic product grew by more than a six-year low of 5% in the first quarter. Core sector rose just 0.1% in August.

The data last month had shown that sector output declined by 0.1, but has been revised upwards.

The data released by the commerce and industry ministry on Thursday showed production in coal, crude oil, natural gas, refinery products, steel, cement, and electricity declined in September. Only fertiliser held out. The overwhelming contraction in the core sector reflects deep stagnation setting in, economists said.

“Such low growth in core sector industries has not been witnessed so far on either the 2011-12 or 2004-05 base. This indicates the severity of industrial slowdown,” said Sunil Kumar Sinha, principal economist, India Ratings.

This may pull down IIP growth for September as well, he added. The IIP declined by more than a seven-year low of 1.1% in August.

Slow growth in the core sector has been blamed especially on volatile changes in refinery production, which commands almost 30% of the index by weight. Production went down by 6.7% in September. The sector has remained volatile in FY20 but managed to grow by 2.6% in August. Senior officials recently said the sector would soon return to growth as a recovery in production was well underway since June, when key refining units were closed and importers were dealing with sudden changes in the oil import value chain due to the government reducing its exposure to Iranian crude oil.

Also in the energy space, crude oil production continued going down, having completed a continuous chain of contraction for the last 12 months. Production reduced by 5.4%, the same as in the previous month of August.

Natural gas extraction also continued to fall for the sixth straight month, reducing by a higher margin of 4.9% in September.

The crisis deepened in coal, which constitutes 10% of the core sector index. Production fell by 20.5% in September after a contraction of 8.6% and 1.6% in the previous two months respectively.

Contraction in the sector continued to become entrenched since July, when sustained growth for 24 months ended. Apart from falling output at India Ltd, a halt in production due to heavy rain and labour issues in certain mines were seen to be  responsible.

Due to less coal mining, electricity generation also faltered in August, with contraction accelerating to 3.7%, up from 0.9% in August. “Additionally, the YoY decline in thermal electricity generation deepened to 10.0% in September 2019 from 3.1% in the previous month, according to data released by the Central Electricity Authority, which drove the contraction in electricity generation,” said Aditi Nayar, principal economist, ICRA.

Elsewhere, cement production saw contraction reduce to 2.1%, after a 5.1-%contraction in the previous month. Growth had remained a dampener in the sector after hitting an 11-month high of 15.7% in March. Another major sector indicating the health of construction and infrastructure development — steel — saw output go down for the first in the past 12-months. Steel output fell by 0.3% in September, after a 5.1% growth in August. Heavy rain in major parts of the country has been blamed for a slowdown in construction activities.

However, the engulfing industrial slowdown seems to have bypassed fertiliser production which hit an 8-month high with 5.4% growth, up from 2.9% in the previous month.

In light of the latest industrial performance in the first quarter of FY20, Nayar expects GDP and GVA growth to dip further in the second quarter, despite a favourable base effect and the cushion provided by lower raw material costs.

Republished from Business Standard by special arrangement.