Core sector output shrinks record 5.2% in September

Likely to dampen GDP growth in Q2; coal production nosedives 20%

The output of the core sector fell a record 5.2 per cent in September, with production by seven of the eight industries declining, portending slow economic growth in the second quarter of this fiscal year too. In September 2018, it had risen 4.3 per cent, and 0.1 per cent in August 2019. Data by the commerce and industry ministry showed production in coal, crude oil, natural gas, refinery products, steel, cement, and electricity declined in September. Coal contracted the steepest by 20.5 per cent. Only fertiliser held out.

Economists said contraction at this rate has not been witnessed in either the new series of the base year of 2011-12, or the previous one with 2004-05 as the base year. Bloomberg said the output contracted to the lowest since at least 2005.

The sector, with above 40 per cent weight in the index of industrial production, grew 1.3 per cent in H1FY20, against 5.5 per cent in the same period of the previous fiscal. Production by the eight industries declined 0.8 per cent in the Q2FY20, against 3.4 per cent growth in Q1 and 5.4 per cent expansion last year.

Gross domestic product (GDP) grew above a six-year low of 5 per cent in the first quarter of FY20. The core sector rose just 0.1 per cent in August. The data last month had shown that output had declined 0.1 per cent in August, but it has now been revised upwards.

The overwhelming contraction in the core sector reflects deep stagnation setting in, economists said.

“Such low growth in core sector industries has not been witnessed so far on either the 2011-12 or 200405 base. This indicates the severity of industrial slowdown,” said Sunil Kumar Sinha, principal economist at India Ratings.

This may pull down IIP growth for September as well, he added. The IIP declined by more than a seven-year low of 1.1 per cent in August.

Slow growth in the core sector has been held to be especially on account of volatile changes in refinery production, which commands almost 30 per cent of the index by weight. Production went down by 6.7 per cent in September.

The sector has remained volatile in FY20 but managed to grow 2.6 per cent in August. Senior officials recently said the sector would soon return to growth as a recovery in production was well under way since June, when key refining units were closed and importers were dealing with sudden changes in the oil import value chain due to the government reducing its exposure to Iranian crude oil.

The crisis deepened in coal, which constitutes 10 per cent of the core sector index. Production fell by 20.5 per cent in September after a contraction of 8.6 per cent and 1.6 per cent in the previous two months respectively. Contraction in the sector continued to become entrenched since July, when sustained growth for 24 months ended. Apart from falling output at Coal India Ltd, a halt in production due to heavy rain and labour issues in certain mines was seen to be responsible.

Due to shrinkage in coal mining, electricity generation also faltered in August, with contraction accelerating to 3.7 per cent, up from 0.9 per cent in August. “Additionally, the YOY decline in thermal electricity generation deepened to 10 per cent in September 2019 from 3.1 per cent in the previous month, according to the data released by the Central Electricity Authority,” said Aditi Nayar, principal economist, ICRA. In the light of the latest industrial performance in the first quarter of FY20, Nayar expects GDP and GVA (gross value added) growth to dip further in the second quarter.