Core sector struggles to get back to pre-COVID levels

Core sector has larger ramifications as it comprises 40.27% of the IIP basket, and is a high-frequency lead indicator of IIP and GDP growth.

February 01, 2021 8:38 IST | India Infoline News Service
December 2020 marked the third successive month of negative core sector growth. There have been some favorable upgrades worth mentioning in previous month’s figures. Core sector contraction for Nov-20 was upgraded from -2.6% to -1.4% giving  hope that December could also get better. What is more gratifying is that the Sep-20 core number was upgraded from -0.1% to +0.6%.

The theory of 10 months negative core sector growth is no longer valid. We had six consecutive months of negative core sector between Mar-20 and Aug-20, followed by positive growth in Sep-20. Post September, we have seen 3 more months of core sector contraction as infrastructure struggles to get back to pre-COVID levels.

Data Source: DPIIT (Department for Promotion of Industry and Internal Trade)
With retrospective revision in Sep-20 core sector to positive growth, there are hopes that even if December remains negative, we could see positive core sector growth in Jan-21. It is rather disappointing that core sector consistently tapered after Sep-20. Core sector has larger ramifications as it comprises 40.27% of the IIP basket, and is a high-frequency lead indicator of IIP and GDP growth.

Positive sectors reduce, even as oil gives hope

One quick inference is that growth is not coming in a consistent pattern. In October, 4 out of 8 sectors were in positive territory. In Nov-20, only 3 sectors were in the positive, which further reduced to 2 in December. Fertilizers also dipped into negative even as losses in cement output deepened.

Data Source: DPIIT
We had said this last time and we reiterate that the good news is in oil which accounts for 45% of the basket. Oil growth is still negative but it is getting closer to pre-COVID levels. The sharp fall in cement is not a good signal because the last quarter is normally a good quarter for cement demand. Both fertilizers and steel disappointed after robust signals.

How the Eight core sectors added up in Dec-20

• Coal Sector (weight 10.33%) output saw +2.9% growth in Dec-20. Growth in coal output has been tapering in the last few months and this can be largely attributed to the base effect. Hopefully, the new coal auctions should address this issue.

• Electricity generation (weight 19.85%) increased by +4.2% in Dec-20. While it is related to coal, there is also a renewable component here. Also, with offices functioning at full capacity, electricity demand is likely to remain buoyant.

• Fertilizers (weight 2.63%); grew by at -2.9% in Dec-20. That is clearly disappointing as the fertilizers sector has been the one to lead the bounce in line with rural demand. It could be the end of Kharif effect, but farmer agitations could dent demand.

• Cement (weight 5.37%) output fell by -9.7% in Dec-20. The whole challenge is there are too much expectations from infrastructure sector with little contribution coming either from home sales or office sales. Both the markets are still oversupplied.

• Steel (weight 17.92%) saw -2.7% contraction in Dec-20. The China exports story has played out and the initial momentum in steel appears to be faltering. Indian steel growth has lagged global steel averages and that is a worry.

• Crude Oil (weight 8.98%) extraction fell -3.6% in Dec-20. The crude output is gradually getting back to pre-COVID levels and supply restrictions globally are likely to keep oil prices buoyant. That could result in higher crude output.

• Natural Gas (weight 6.88%) production fell -7.2% and is still looking weak. However, there has been a sequential improvement in these numbers. There are structural issues on pricing that need to be addressed in gas.

• Refinery Products (weight 28.04%) fell -2.8% and is, perhaps, the one reason to be positive about Dec-20. With 28% weight, refinery products have benefited from improved GRMs and richer inventory valuations.

Budget can make a big difference to core sector growth

Crude accounts for 45% of the core sector. Brent has scaled closer to $56/bbl and that should support crude output and refinery throughput to cross pre-COVID levels. Some of the sectors with strong externalities like steel and cement have disappointed. That is where Budget 2021 assumes significance.

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-Dec FY21
Core Sector Growth (%) -10.1%
Data Source: DPIIT

Union Budget 2021 will be a fiscal tightrope but it needs to boost infrastructure, provide incentives for capital investments and put more liquidity and purchasing power in the hands of people. It will surely need a lot of money.

The core sector is delicately poised and Budget 2021 can give the much-needed impetus. Cumulative core sector (Apr-Dec) contracted -10.1% and may get close to the projected GDP contraction of -7.7% by Mar-21. How successfully the budget gives a boost to consumption and investment demand will determine how effectively and decisively the core sector props up the Indian economy!

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