Core sector output shrinks for fifth straight month in July, down 9.6%

IIP growth had contracted by 16.6 per cent in June compared to 33.8 per cent in May and a record 57.6 per cent slide in April
The fall in the output of the eight core sectors of the economy further slowed in July as the economy reopened, but the year-on-year decline was still 9.6 per cent as industry battled demand slump, an acute liquidity crisis and labour shortages in the aftermath of the nationwide lockdown. In June, the core sector output had plunged 12.9 per cent.

Pace of contraction had reduced during the previous three months after crashing by 36 per cent in April. However, the updated figures released by the Commerce and Industry Ministry on Monday showed seven of the eight core sectors continued to contract in July, the third straight month of such a development.

The infrastructure segment continued to see the worst 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. Steel remained the worst-performing sector for the third month in a row, shrinking 16.4 per cent. This was, however, a good show for the sector as production had tumbled 25.4 per cent in June.

On the other hand, contraction in cement production again widened in July. The sector saw a fall of 13.5 per cent after it had managed to cut contraction to just 6.8 per cent. Latest updated estimates show steel and cement production had caved in by 82.8 and 85.2 per cent in April respectively.

In June, production of refinery products also saw bigger output fall, as imports of crude oil wilted. The sector had remained volatile throughout FY20, but senior officials had said solid recovery in production was underway as key refining units pushed out more. The sudden drop in global demand, as the pandemic stifled economic activity everywhere, led to a contraction in the sector, experts said. Final production dwindled to 13.9 per cent, after falling by 8.9 per cent in June. Refinery production has the biggest weight among the 8-core sectors 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 22nd month in a row. The output reduced 4.9 per cent in July, after contracting six per cent in the previous month. Natural gas production, too, contracted for the 15th straight month, reducing 10.2 per cent after a 12 per cent fall in June. Coal production saw relatively better performance in July with output reducing 5.7 per cent, down from 15.5 per cent in June, partly reflecting the impact of subdued coal offtake levels.

By extension, electricity generation also contracted albeit at a slower pace. The pace of Year-on-Year contraction in electricity generation declined to 2.3 per cent, down from June's 11 per cent fall.

Fertilisers stood out as the sole sector that continued to grow. Fertiliser output rose 6.9 per cent in July, after a 4.2 per cent rise in June. "Clearly the industry was less affected by the shutdown and production continued as demand from agriculture was high. This demand along with replacement of stocks in advance for the rabi sowing later in October-November has partly contributed to this increase in production," said Madan Sabnavis, chief economist at CARE Ratings.

Given the relationship between core sector growth and the Index of Industrial Production (IIP) growth, the latter may be expected to contract by 12-14 per cent, added Sabnavis. IIP growth had contracted by 16.6 per cent in June compared to 33.8 per cent in May and a record 57.6 per cent slide in April. This is likely to pull down first-quarter gross domestic product of 2020-21, the data for which would be released later today.

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