Core sector expands +6.8% in Mar-21 as base effect plays out

The positive trend of Mar-21 could get perpetuated for a few more months due to the base effect.

May 03, 2021 09:05 IST India Infoline News Service

Core sector growth for Mar-21 was at a 32-month high. After struggling for most of 2021 to acquire a positive flavour, the core sector for the month of March 2021 showed positive growth of +6.8%. However, this number must be taken with a pinch of salt. This growth is more optical because of the base effect. For example, Mar-20 core sector shrank at -8.6%. That tapers the base and magnifies core sector growth in the current month.

There had been negative core sector growth consistently between Mar-20 and Aug-20. That means; for the next 4-5 months, the core sector growth could benefit from a low base. Such growth on an artificially low base, is a sign of a dead-cat bounce rather than a growth signal.

Despite base effect, upgrades are favourable

Agreed that the base effect magnified the core sector growth for Mar-21. However, upgrades have still been favourable. For example, the Fed-21 core sector contraction was upgraded from -4.6% to -3.8%. Similarly, the Dec-20 core sector growth also got upgraded from 0.2% to 0.4%.The good news is that deeper data is only showing better growth.

Data Source: DPIIT (Department for Promotion of Industry and Internal Trade)

It is said that a few swallows do not a summer make. The positive trend of Mar-21 could get perpetuated for a few more months due to the base effect. However, one must keep in mind that the full-year core sector contracted by -7.0% in FY21. That means; overall core sector output is way below 2019 levels. What would be of interest this year is whether the positive trend can sustain after the base effect wanes.

Laggards of Mar-20 become the stars of Mar-21

After a long time, perhaps more than a year, 4 core sectors showed double-digit growth. Ironically, cement, steel, electricity and natural gas were all laggards in Mar-20 and hence even a marginal return to normalcy got magnified into a growth story. However, the positive growth in natural gas was an outcome of KG-D6 output of RIL coming into the market pool.

On the negative side, crude oil and refinery products have been weak yoy largely due weak oil demand even as refiners have been deliberately cutting crude offtake to run refining plants at lower capacity.

Data Source: DPIIT

It would be essential for steel and hydrocarbons to sustain positive traction as they have a substantial weightage in the core sector basket.

How the Eight core sectors added up in Mar-21
  • Coal Sector (weight 10.33%) output saw -21.9% decline in Mar-21. Growth in coal output had been tapering in last few months but the de-growth in March was largely on account of a solid base last year.
  • Electricity generation (weight 19.85%) rose by 21.6% in Mar-21. Here, the base effect was at play because power generation had been badly impacted in Mar-20 as most offices and factories had to shut down.
  • Fertilizers (weight 2.63%); fell by -5.0% in Mar-21. It is believed that the farmer agitation has dented the demand for fertilizers. However, the government does expect another bumper Kharif output this year.
  • Cement (weight 5.37%) output gained by +32.0% in Mar-21. This is again a base effect story. With construction coming to a virtual halt in Mar-20, the cement output had taken deep cuts. Hence the effect may once again be magnified.
  • Steel (weight 17.92%) saw +23.0% growth in Mar-21. Steel has been a key contributor to the positive 6.8% core sector growth considering the weight of steel in the overall core sector basket.
  • Crude Oil (weight 8.98%) extraction fell -3.1% in Mar-21. It is a lot more demand driven as the spate of lockdowns negatively impacted demand and refiners triggered force majeure to reduce crude offtake.
  • Natural Gas (weight 6.88%) production rose +12.3% and is one of the big contributors to the bounce. This is largely driven by the KG-D6 output entering the all-India market, which has boosted natural gas output in a big way.
  • Refinery Products (weight 28.04%) fell -0.7% and it quietly triggered the core sector bounce due to its substantial weightage in the basket. Most refiners cut crude offtake as they see limited demand for petrol and diesel in present conditions.
India ends FY21 with -7.0% core sector contraction

Core sector with a 40.27% weight in IIP needs to provide the much-needed push if Indian economy has to build on the advantages of GDP recovery in the Dec-20 quarter.

Year 2012-13 2013-14 2014-15 2015-16
Core Sector Growth (%) 3.8% 2.6% 4.9% 3.0%
Year 2016-17 2017-18 2018-19 2019-20
Core Sector Growth (%) 4.8% 4.3% 4.4% 0.4%
Year Apr-Mar FY21
Core Sector Growth (%) -7.0%
Data Source: DPIIT

The core sector contraction for fiscal year FY21 came in at -7.0%. That would imply negative GDP for the full year in the range of 10-11%. Will this set the stage for another fiscal stimulus? We will have to wait for that to fructify!

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