The year has been negative for the core sector overall with the growth dipping into negative territory on 5 occasions in the last nine months. The sharp fall in March was attributed to the partial lockdown while the fall in April can be attributed to the total lockdown during the month.
How the constituents of core sector played out?
The core sector consists of 8 key infrastructure sectors which form the backbone of the Indian economy. The core sector has a 41% weightage in the IIP and hence has a strong influence on industrial production as well as on GDP growth. Often, the core sector acts as the lead indicator for IIP and GDP.
• Coal Output (weight 10.33%) output saw a 15.5% fall in Apr-20. This was driven by lower demand from thermal power plants as well as non-availability of rakes to transport coal from the mines.
• Crude Oil (weight 8.98%) extraction fell by 6.4% largely due to logistical and demand pressures faced by ONGC and OIL. Output also remained low due to weak refinery demand with most vehicles being off the road.
• Natural Gas (weight 6.88%) production fell sharply by 19.9% on account of most regional gas consumers exercising the force majeure clause and putting off their gas orders. Weak LNG demand played a role in the fall.
• Refinery Products (weight 28.04%) fell sharply by 24% in April as demand for petrol and diesel waned sharply during the month on account of the total lockdown. Globally, refining margins are at multi-year lows.
• Fertilizers (weight 2.63%) was a relatively better performer with output contracting by just 4.5% considering that it is classified as an essential product. However, the overall impact was limited due to its low weight.
• Steel (weight 17.92%) output was a major trigger for lower core sector growth. The sharp 83.9% fall was driven by factories locked down and virtually no demand coming from key consumers of steel like automobiles, construction and durables.
• Cement (weight 5.37%) output was also extremely weak falling by 86% on a YOY basis. The weak cement output was due to plants operating at low capacity levels on account of limited demand from housing and infrastructure projects.
• Electricity (weight 19.85%) generation also fell by 22.8% as demand for electricity from factories and offices compressed substantially due to the big shift towards work-from-home (WFH) models.
Core sector matters due to its externalities
Apart from the fact that core sector accounts for 40.27% of IIP, it is also important due to strong externalities. For example, cement and steel are critical for the construction sector. Construction normally enjoys a 1.6X elasticity versus GDP growth. That means; a 5% growth in construction results in an 8% growth in GDP. Secondly, the fuel cycle is best captured in the core sector output with a weight of close to 60% and demand for oil has normally had a very high correlation with growth in GDP. Therefore, the core sector numbers capture the supply side and the demand side of the economy with much greater precision and hence remain one of the key lead indicators for growth.
Need to arrest the falling trend of core sector growth
The challenge for core sector growth is not just about the last 1 year but the trend compared to last 7 years.
|Core Sector Growth (%)||3.8%||2.6%||4.9%||3.0%|
|Core Sector Growth (%)||4.8%||4.3%||4.4%||0.4%|
The above table clearly indicates that the core sector growth in 2019-20 has fallen sharply from an average of above 4% to just about 0.4%. Since the lockdown was only active for 8 days in the previous fiscal, that cannot be the sole reason. While weak oil demand is one reason for the fall in core sector output, the government must make the pricing and tax structure more favorable to the producers and the consumers rather than just focus on revenue enhancement. Opening up of the coal sector to private competition is a good move and a similar liberalization of the oil sector is also called for to improve output. The government needs to get its focus back on its massive infrastructure projects, which can be the best trigger for core sector growth. With the lockdown being lifted in phases; infrastructure should be the priority of the government.