Core sector output shrinks for sixth straight month in August, down 8.5%

After slowing for the previous four months, contraction in core sector output again worsened in August.

Output declined by 8.5 per cent, following July’s 8 per cent fall as an acute demand slump and the continuing liquidity crisis affected most industries.

The pace of contraction had reduced since April, when output had fallen by a record 38 per cent. However, updated figures released by the commerce and industry ministry on Wednesday showed seven of the eight industries in the core sector continued to contract in August. It is the sixth straight month this has happened.

The biggest fall was experienced by refinery production as imports of crude oil wilted by 41 per cent. The sector had remained volatile throughout FY20 and the current year. The sudden drop in global demand, as the pandemic stifled economic activity everywhere, led to a contraction in the sector, said experts.

Overall production dwindled 19 per cent in August, after falling by 14 per cent in July. Refinery production has the biggest weightage among the eight core sector industries and experts expect it to drag down total production figures in the coming months.

In tandem, crude oil production continued its downward spiral for the 23rd month in a row. The output reduced 6.3 per cent in August from the 4.3 per cent fall in the previous month. However, coal production turned positive in the latest month with output expanding by 3.6 per cent, after reducing by 5.7 per cent in July, as coal offtake levels rose steadily.

By extension, electricity generation also contracted, albeit at a slow pace. Year-on-year (YoY) contraction in generation stood at 2.5 per cent in August, after July’s 2.3 per cent fall.

“There was a sharp deterioration in hydroelectricity generation to a contraction of 2.9 per cent in August from 13.6 per cent expansion in the previous month. De-growth in thermal electricity generation worsened marginally to 2.4 per cent from 2.2 per cent in July,” said Aditi Nayar, principal economist at ICRA.

Overall, with contraction in electricity generation from August-December 2019, this sector may outperform most of the remaining economy in the next few months, led by favourable base effects, she pointed out.

The infrastructure segment also continued to see major production shocks. The already volatile sectors of steel and cement have been badly affected by the Covid-19 pandemic as social distancing norms meant that construction remained largely suspended across the country.

Contraction in steel production stood at 6.3 per cent, after a 8.3 per cent fall in the previous month.

On the other hand, contraction in cement production again widened in August to 14.6 per cent.

Fertiliser stood out as the sole sector with burgeoning growth. Fertiliser production rose 7.3 per cent in August, after July’s 6.9 per cent rise. Relatively high demand from agriculture along with replacement of stocks in advance for rabi sowing later in October-November partly contributed to this increase in production, experts said.

Given the relationship between core sector growth and the index of industrial production (IIP) growth, the latter may contract modestly to 6-8 per cent in August, from the initial 10.4 per cent in July.