Core sector shrinks as Covid-19 pressures starts to show

Out of the twelve-monthly data points, the core sector growth was negative in 5-months and positive in 7-months during fiscal 2020. Here is how the core sector components panned out for March 2020.

May 05, 2020 03:05 IST India Infoline News Service

The core sector growth for March 2020 came in at (-6.50%). While the markets had been prepared for negative growth in March, the shrinkage in the core sector was much more than expected.  
Data Source: Ministry of Commerce & Industry
The core sector growth for March 2020 has dipped sharply to -6.50% levels from a positive growth of 5.50% in the month of February. In fact, out of the twelve monthly data points, the core sector growth was negative in 5 months and positive in 7 months during fiscal 2020. The sharp fall as an outcome of COVID-19 related lockdowns has virtually neutralized the recovery in core sector growth that India saw between December and February. The reason core sector growth is critical in the Indian context is that it accounts for over 40% of the IIP and also has an oversized impact on GDP due to its multiplier effect.

Key takeaways from core sector numbers for March 2020

The core sector growth captures the output growth in 8 of the key infrastructure sectors that constitute the backbone of the economy. Here is how the core sector components panned out for March 2020.
•Coal Production (weightage: 10.33%) witnessed 4% growth in the month of March as coal production managed a revival after facing challenges through the year.

•Crude Oil (weightage: 8.98%) saw an output decline of 5.5% for March, which is hardly surprising considering the non-remunerative prices prevalent for crude oil.

•Natural Gas (weightage: 6.88%) saw a sharp decline of 15.22% in March as the sharply lower prices fixed for gas by the government left little incentive for gas extractors.

•Refinery Products (weightage: 28.04%) fell marginally by 0.5% as the COVID-19 impact only hit in the last week of March. This avoided a precipitous fall in core sector.

•Fertilizers (weightage: 2.63%) also saw an 11.9% fall in production during the March 2020. The weak agri demand and low rural incomes had an impact on fertilizer output.

•Steel (weightage: 17.90%) saw a decline of 13% in March as steel companies had shut down production from February itself due to tepid demand and Chinese competition.

•Cement (weightage: 5.37%) saw one of the sharpest cuts of 24.7% as construction demand virtually dried out and most cement factories were forced to shut down.

•Electricity generation (weightage: 19.85%) also had a fall of 7.2% in the month of March, largely due to power generation units remaining shut due to weak factory demand.

Fiscal 2020 sees lowest core sector growth in 7 years

The annual core sector growth has been captured in the chart below.
Data Source: Ministry of Commerce & Industry
After staying above 4% for a better part of the last 7 years, the core sector growth in 2019-20 has dipped to a multi-year low of just 0.6%. This has multiple implications as far as the macro economy and the financial markets are concerned. Firstly, it is a clear indication that growth visibility may still be some time away as core sector is normally the lead indicator. Secondly, the core sector industries like refining, steel, cement and electricity have strong externalities in the sense that their impact on growth has a multiplier effect. Weak core sector growth will mean weak multiplier effect for the economy. For the full year, it is crude oil and natural gas that have pulled the core sector growth down. With tepid oil prices, there is limited visibility for both these sectors. Thirdly, the core sector has a weightage in excess of 40% on the IIP and that would mean that industrial growth would also be weak in the month of March.

Clearly, the pressure of COVID-19 is showing as 7 out of the 8 core sector groups have shown negative growth in March 2020. A clearer picture of the core sector growth should emerge once the immediate impact of COVID-19 is over.

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