As the above graph depicts, the Indian economy witnessed negative core sector growth in 6 out of the last 13 months. The month of May saw some of the business establishments starting operations, but the lag effect of the lockdown continued to manifest in the form of weak transport logistics, raw material availability and the ready availability of labour.
How the 8 key segments of core sector panned out in 2020?
The core sector consists of 8 key infrastructure sectors which constitute the backbone of the Indian economy. That is why the Core Sector is also called the Infrastructure Index. Core sector has a 40.27% weightage in the IIP and hence strongly influences industrial production as well as GDP growth. Here is how the 8 sub segments panned out in May 2020.
- Coal Sector (weight 10.33%) output saw a 14% fall in May-20. The demand from thermal plants did improve over April but still remains way below previous year levels. Transport and logistics has also been a major headwind for coal sector.
- Crude Oil (weight 8.98%) extraction fell by 7.1% and continued to remain weak with most refiners going slow on stocking. Although refineries have started operating, the capacity utilization has only picked up from the last week of May.
- Natural Gas (weight 6.88%) production fell sharply by 16.8% with most of the city gas suppliers exercising force majeure clauses and putting off gas orders. Volatile gas pricing has also been a key reason for this tepid growth.
- Refinery Products (weight 28.04%) fell sharply by 21.3% in May-20 due to weak refining margins and tepid demand for fuel. Cars are just getting back to the roads but GRMs are now almost in negative territory.
- Fertilizers (weight 2.63%) was a star performer with output actually growing by 7.5% in May. Even in April fertilizers output was the least impacted but has turned out to positive growth in May. It remains the only positive spot in the core sector.
• Steel (weight 17.92%) output was a key trigger for lower core sector growth. The sharp 48.4% fall was better than the 83% fall last month but most steel companies have put production on hold. Pick-up in exports could be a trend that could mark a shift.
• Cement (weight 5.37%) output was also extremely weak falling by 22.2% in May-20. Again, this is better than the 80% fall in April but the residential construction and infrastructure activity is just about picking up and may take some more time.
• Electricity (weight 19.85%) generation also fell by 15.6% as demand for electricity from factories and offices were sharply lower. Most power producers are operating at sub-optimal PLF just to keep variable costs at bay.
Core sector could leave a huge lag effect
As we mentioned earlier, core sector has a 40.27% weight in the IIP and hence does play a key role in growth. But there is also an issue of elasticity and externalities. What it means is that most of these sectors have a secondary level exponential impact. Be it electricity, steel or cement, the next level impact is a multiplier which is why core sector becomes crucial. Also sectors like fertilizers have strong externalities in the form of rural incomes and rural demand. Above all, oil is the best barometer of economic robustness. That is where the lag effect on core sector growth could impact GDP and IIP for much longer.
Core sector may have dipped to a lower normal
|Core Sector Growth (%)||3.8%||2.6%||4.9%||3.0%|
|Core Sector Growth (%)||4.8%||4.3%||4.4%||0.3%|
|Core Sector Growth (%)||-30%|
One can argue that the above data for FY21 may be relatively misleading as April and May were abnormal months. However, one cannot miss the larger message. With core sector growth averaging (-30%) in the first two months, it would be a big task for the economy to even get close to positive growth for the financial year 2020-21. That would only mean that the downward trend of core sector growth for FY21 will only get accentuated. That will be the big challenge and it must also be the focus area that policy makers need to look at.