Core sector fall continues in Jun-20 but the worst may be over

The Indian economy witnessed negative core sector growth in 7 out of the last 13 months, with the last 4 months showing deep cuts on a YOY basis.

Aug 03, 2020 08:08 IST India Infoline News Service

The month of Jun-20 was not a month of total lockdown but the combination of weak demand and erratic supply meant that core sector continued to remain subdued. The contraction in June at (-15%) was relatively better compared to (-22%) in May and (-37%) in April. It could be the first sign that the output of the core sector may be bottoming out, although we may have to wait for confirmation from other high-frequency indicators. While weak demand is one side of the story, the bigger challenge that most of the manufacturers are facing is the disruption of supply chains, both on the input side and the output side. Till that is resolved, core sector output may remain under pressure.

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

As the above graph shows, the Indian economy witnessed negative core sector growth in 7 out of the last 13 months, with the last 4 months showing deep cuts on a YOY basis. Business has kicked off in most sectors but social distancing, region specific restrictions and lack of transport facilities are throwing a spanner in the works.

How the 8 key components of core sector stacked up in June 2020?

The core sector consists of 8 key infrastructure sectors which actually form the backbone of the Indian economy. That is the reason the Core Sector is also called the Infrastructure Index. It is critical because the core sector has a 40.27% weightage in the IIP and hence strongly influences industrial production and GDP growth. Let us look at how the 8 key components stacked up in June 2020.

•  Coal Sector (weight 10.33%) output saw a 15.5% fall in Jun-20. It was slightly deeper than the May contraction. Even as demand from           thermal plants has picked up industrial demand remains tepid. Recent strikesat Coal India also aggravated the situation.

•  Crude Oil (weight 8.98%) extraction fell by 6.0% and continued to remain weak. Crude output has been affected due to ongoing disputes       at key fields and also due to low prices of global crude; hovering around $40/bbl in the Brent market.

•  Natural Gas (weight 6.88%) production fell by 12.0% and is still weak, although better than May. While gas pricing has not been too               favorable for gas producers, the transport infrastructure and tepid demand have also played spoilsport.

•  Refinery Products (weight 28.04%) fell by 8.9%,an improvement over May-20. Most refiners are going slow on stocking. Refineries have       seen a slow pick-up in demand and are also facing weak Gross Refining Margins (GRMs).

•  Fertilizers (weight 2.63%) was the star performer for the second month in a row with output growing by 4.0% in June after 7.5% growth in       May. It remains the only positive spot in the core sector and is getting a boost from the normal monsoons.

Data Source: DPIIT

•  Steel (weight 17.92%) output was again the key trigger for lower core sector growth. The sharp 33.8% fall was better than the previous         two  months but steel demand is still tepid due to limited infrastructure outlays. Global demand has been a minor saviour.

•  Cement (weight 5.37%) output was also weak falling by 6.9% in Jun-20. However, it must be said that cement production has shown the        best traction and is evident from the performance of cement companies in the stock market.

•  Electricity (weight 19.85%) generation also fell by 11.6% as demand for electricity from factories and offices were sharply lower. This has       led to low PLF utilization and could eventually impact the profitability of these power companies.

Has the core sector really bottomed out?

That is a tough question to answer but is critical because the core sector constitutes 40.27% of the overall IIP. Hence recovery in core sector is normally the lead indicator for any improvement in GDP output. There are some early positive indications from fertilizers that hint at a recovery led by rural India. Also, the improvement in cement output hints that construction and infrastructure activities are picking up; so the stocking during monsoons is a good sign. However, it is equally important that sectors like steel, refining, coal and electricity pick up as they have strong externalities and can magnify GDP growth.

FY21 could see negative core sector growth

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-Jun FY21
Core Sector Growth (%) -24.6%


The first quarter really looks like a lost quarter due to the pandemic driven lockdown. With negative core sector contraction of (-24.6%) in the first quarter, it is almost certain that FY21 will see negative core sector growth. After the tepid 0.4% growth in FY20, this could be a new negative normal for core sector. Hopefully, the recovery signals should be for real!

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