Core sector remains in the negative for ninth month in a row

November is the third month in which the negative growth has widened.

January 01, 2021 8:01 IST | India Infoline News Service
The month of November 2020 marked the ninth consecutive month of negative IIP growth, starting from March 2020. However, there were some favorable upgrades in terms of previous month’s figures. Core sector contraction for Aug-20 was upgraded from -7.3% to -6.9% and growth for Oct-20 was upgraded from -2.5% to -0.9%.

November is the third month in which the negative growth has widened. From -0.1% in Sep-20, it fell to -0.9% in Oct-20 and to -2.6% in Nov-20. The only hope is that, like in previous months, November 2020 core sector number could also improve when revised.

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

The month of Sep-20 had given hope that core sector growth will finally move into positive territory. However, the core sector number peaked in September and has consistently tapered after that. Core sector is extremely critical because it comprises 40.27% of the IIP basket, and is an important high-frequency lead indicator for GDP growth.

Two broad trends were visible in Nov-20. Sectors like fertilizers, coal and electricity which had shown good growth traction in last few months have tapered. However, heavyweight oil sector is getting back to pre-COVID levels.
Positive growth sectors show subdued growth in Nov-20

In April and May 2020, all 8 core sectors showed negative growth. However, by October 2020, we saw 4 out of the 8 sectors in positive territory. In Nov-20, the 3 positive sectors; coal, electricity and fertilizers saw tapering of growth. Cement dipped from positive to negative growth in Nov-20.

Data Source: DPIIT

Both crude oil and refinery products are getting closer to pre-COVID levels. That is good for core sector as oil has the highest weightage in the basket. However, the construction and infrastructure activity boost did not result in a turnaround in cement and steel.

How the Eight core sectors panned out in Nov-20
  • Coal Sector (weight 10.33%) output saw +2.9% growth in Nov-20. This is sharply lower than the growth that we saw in the month of October and can be largely attributed to the base effect.
  • Electricity generation (weight 19.85%) increased by +2.2% in Nov-20. Like in the case of coal, the positive growth was sharply lower. Coal and power sector tend to be closely linked as coal demand comes predominantly from thermal power generators.
  • Fertilizers (weight 2.63%); grew by at +1.6% in Nov-20. Clearly, fertilizers sector has benefited from robust Kharif, build-up to Rabi sowing. However the end of Kharif and the ongoing farmer’s agitation appears to have taken a toll on fertilizer output.
  • Cement (weight 5.37%) output fell by -7.1% in Nov-20. There were great hopes of a infra-led boom in growth after cement turned into positive last month. However, in Nov-20, cement output has dipped again.
  • Steel (weight 17.92%) saw -4.4% contraction in Nov-20. The spike in exports to China appears to have played out and the initial momentum in steel production has flattened. Indian steel growth has lagged global steel averages.
  • Crude Oil (weight 8.98%) extraction fell -4.9% in Nov-20. The crude output is gradually getting back to pre-COVID levels and that has been largely helped by the Brent Crude prices at above $52/bbl.
  • Natural Gas (weight 6.88%) production fell -9.3% and is still looking weak. The cuts in natural gas production continued in November and the cut in gas prices offered has not gone down too well. Gas producers find government regulated prices unviable.
  • Refinery Products (weight 28.04%) fell -4.8% and is, perhaps, the one reason to be positive about the month of November. With a 28% weight, refinery products have benefited from improved GRMs and better inventory valuations.
Three big questions for policymakers to ponder

Crude accounts for 45% of the core sector and that has touched $52/bbl. For policymakers, it is a trade-off between better core sector numbers and pressure on current account. Secondly, steel and cement have disappointed and the question is why they are not picking up in sync with the aggressive infrastructure push. Lastly, the big positive drivers of core sector like power, coal and fertilizers have been too erratic in recent months.
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-Nov FY21
Core Sector Growth (%) -11.4%
Data Source: DPIIT

For the first 8 months of fiscal 2021, all sectors other than fertilizers have shown negative growth, with steel and cement the worst hit. With core sector contraction at -11.4% in the first 8 months, it does look like India will end the fiscal 2021 in the negative. The real test will be; how much of the damage of the last 8 months, can be mitigated in the coming four months. That will be the growth litmus test!

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