All-round contraction in core sectors leads to 4.6% fall in overall index

May sharpen decline in IIP in Feb

Output of all the eight industries contracted in February, dragging down overall core sector production to a de-growth of 4.6 per cent in February which snapped mild growth in the previous two months.

This may adversely affect the index of industrial production (IIP) as the core sector has over 40 per cent weight in it.  In fact, contraction may accelerate in IIP in February from 1.6 per cent fall in January.

While some contraction was expected due to a high base effect of 6.4 per cent, the very fact that all segments saw fall in the output is a  worrisome, said experts.

"The fact that all sectors have gone negative is a disappointment," said CARE Ratings chief economist Madan Sabnavis.

Output of core sector industries saw a fall of 8.3 per cent in the first 11 months of 2020-21 against 1.3 per cent growth in the corresponding period  of the previous financial year. The output of these industries did not contract in any of the previous at least eight years.  

If base effect is a major factor, the output of the core sector should expand quite a lot in March because it started declining from March onwards till entire 2020 except for September and December.

"It would be interesting to see how March turns out as that was the first month of sharp decline in all industrial activity and a favourable base effect will help," Sabnavis said.

However, unlike the previous year when March saw national lockdown for a week, this time around there were localised lockdowns.

While surge in March may not turn contraction to growth for the entire 2020-21, it may do so for the last quarter of the year

Basically, negative growth in steel by 1.8 per cent and cement by 5.5 per cent in February shows that demand for infrastructure has not picked up.

“In fact, growth in cement has been negative for four successive months which can be related with the prospects in the real estate construction industry which is low. In case of steel, user industries have shown less buoyancy which is getting reflected here,” Sabnavis said.

Electricity generation dipped marginally by 0.2 per cent. This is not significant but reflects low growth in demand from the commercial sector including manufacturing and services.

The oil industries continued to be depressed with crude oil, refinery products as well as natural gas registering decline in their output.

Coal has registered the second successive negative growth rate. Sabnavis said while the high growth in 2020 did have a bearing, lower power generation impacted growth in this industry.

The core sector industry and IIP does not have that much impact on the gross domestic product (GDP) numbers these days. This is so because GDP is now a value added concept whereas core and IIP tell a volume story. However, GDP was also projected to fall by 1.1 per cent in the  fourth quarter of 2020-21 in the second advance estimates.