The good news was that the retrospective core sector was reset favourably for the months of May 2020 and for July 2020, albeit by 100-150 bps. Infrastructure output has reached 90% of pre-COVID levels, but the challenge is picking up momentum from here. Core sector, comprising 40.27% of the IIP, is an important high-frequency indicator for GDP growth. With the EMI moratorium extended to 2 years and a major restructuring under way, the acceleration impact of bank credit will be limited.
The positive takeaway is that the core sector appears to have stabilized at a tad above 90% of pre-COVID output. Additionally, the May-20 contraction was revised favourably to (-21.4%) while the Jul-20 core sector contraction was also revised favourably from (-9.6%) to (-8%). This gives hope of a likely favourable revision in Aug-20 data also.
The good news: 2 out of 8 core sectors growing positively
In the months of April and May, all the 8 core sectors showed negative growth. This improved with 1 sector working positively in June and July. Now in Aug-20, we have 2 sectors that have shown positive growth. The core sector growth is critical because it has a 40.27% weightage in the IIP. As a result, it potently influencesIIPand GDP growth. Here is how the 8 components of core sector stacked up in Aug-20.
• Coal Sector (weight 10.33%) output saw +3.6% growth in Aug-20. There has been a consistent improvement in the coal sector output in the last few months and it has finally turned around. Robust power demand has helped as also has stable labour.
• Crude Oil (weight 8.98%) extraction fell by (-6.3%)in Aug-20. The growth has actually deteriorated in August compared to July, which is not surprising considering that the crude prices and demand for crude have remained under pressure.
• Natural Gas (weight 6.88%) production fell by (-9.5%)and is still looking very weak. The latest cut in natural gas prices by 25% could add to this tepidness as the major gas producers like ONGC and OIL were already unhappy with last-half prices.
• Refinery Products (weight 28.04%) fell by (-19.1%) worsening compared to Jul-20. Refineries have seen slow improvement in demand and the weak GRMs have not helped. The benchmark Singapore GRM continues to remain in negative territory.
• Fertilizers (weight 2.63%);the other positive performer for the fourthmonth in a row saw output growing by +7.3% in Aug-20. This sector has surely benefited from the positive cues from monsoons and a solid Kharif output.
• Steel (weight 17.92%) saw a (-6.3%) fall in Aug-20. Compared to the previous month, there has been a marked improvement in steel performance and that can be largely attributed to robust export demand for steel from China and Vietnam.
• Cement (weight 5.37%) output was also weak falling by (-14.6%)in Aug-20. The tepid cement output clearly shows that the sector still operates at sub-optimal capacity utilization as construction and infrastructure demand remain under strain.
• Electricity (weight 19.85%) generation also fell by (-2.7%)showed better performance due to the strike in CIL being called off and demand starting to build from industrial consumers as factories restart.
Core sector awaits another stimulus
Clearly, the core sector growth being in contraction mode for the sixth month in succession is unprecedented and hints at structural issues with the economy. Infrastructure growth is not only essential to spur growth in other sectors; it also has a multiplier effect. With GDP growth at (-23.9%) in Jun-20 quarter and expected at (-11%) for FY21, the onus is on the core sector to give a boost to GDP. That calls for a second round of fiscal stimulus, notwithstanding its potential impact on the fiscal deficit. That is the only way out.
FY21 will see negative core sector growth, but it may not be all that bad
|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 (%)||-17.8%|
As we have maintained in the previous months, negative core sector growth in FY21 is now inevitable considering the levels at which the core sector is growing after five months. It will be the first time in more than 20 years that India will see negative core sector growth. However, the extent of contraction has improved by almost 270 bps MOM. A sustained improvement could hold the key to GDP growth in the next 3 quarters!