Out of pain zone, but recovery is faltering
It is tough to say as of now whether the core sector negative thrust in Feb-21 is a one-off event or a structural issue. But one thing is certain that there has been a negative breakout of the core sector number from the tepid trend of the last few months.
If you look at the above chart, the pain zone between Mar-20 and Aug-20 is certainly history. In the last five months, the core sector did struggle to hold in the positive but Feb-21 has seen a sharp negative turn. It could be partly attributed to the downstream impact of the second wave of COVID that is in evidence for last couple of months. It is important that the momentum of recovery in core sector over last 5 months is not stalled.
Refineries and steel take a toll on core sector
There are two trends that are visible in the Feb-21 core sector data and both are not too encouraging. For the first time in six months, all the 8 components of core sector have shown negative growth. In recent months, we had 3-4 sector showing positive traction. Secondly, the pressure has come from high weightage sectors like oil refining which has dipped sharply and steel sector which turned negative.
A major worry is negative growth in electricity, coal, steel and fertilizers; which had been positive in most of the previous months.
Hydrocarbons account for 45% of the core sector basket. Within hydrocarbons, extraction and natural gas have still been at par or better but there has been a sharp fall in refining as crude prices were taking a toll on GRMs.
How the Eight core sectors added up in Feb-21
- Coal Sector (weight 10.33%) output saw -4.4% decline in Feb-21. Growth in coal output had been tapering in last few months but the de-growth in the month of February has been one of the worst in recent months.
- Electricity generation (weight 19.85%) fell by -0.2% in Feb-21. As we mentioned earlier, there was some lag impact of the partial shutdowns seen on the electricity demand and power generation but coal availability was also an issue.
- Fertilizers (weight 2.63%); fell by -3.7% in Feb-21. The fears that the farmer agitation would dent demand for fertilizers is coming true and this could negate the gains of a good Kharif and Rabi crop.
- Cement (weight 5.37%) output fell by -5.5% in Feb-21. This sector had flattered during the recovery period post July but appears to have lost its momentum as the demand for housing has not kept pace.
- Steel (weight 17.92%) saw -1.8% de-growth in Feb-21. The big boost from domestic and export demand is waning and to an extent that can also be attributed to the slowdown in construction activity in the Indian economy.
- Crude Oil (weight 8.98%) extraction fell -3.2% in Feb-21. While still de-growing, this segment has done better than the previous month. However, output from the major fields continue to be largely constrained.
- Natural Gas (weight 6.88%) production fell -1.0% and is now certainly looking more encouraging. Needless to say, it does look like the KG-D6 output appears to be coming into the market in a significant way.
- Refinery Products (weight 28.04%) fell -10.9% and it triggered the core sector dip due to it substantial weightage and sharp fall in output. Clearly, the lag effect of the pandemic appears to be showing.
Core sector with a 40.27% weight in IIP needs to give a push if Indian economy has to build on the advantages of a flatly positive GDP growth in the Dec-20 quarter.
|Core Sector Growth (%)||3.8%||2.6%||4.9%||3.0%|
|Core Sector Growth (%)||4.8%||4.3%||4.4%||0.4%|
|Core Sector Growth (%)||-8.3%|
The core sector contraction in the first 11 months of FY21 stands at -8.3%. With just one month to go for the fiscal year, full-year core sector may converge towards this number. That would certainly put pressure on Q4 GDP and also raise questions over the sharp GDP recovery estimated in FY22.