Core sector disappoints, contracts 0.4% in April

Fall for a second month; spurs speculation about Reserve Bank rate cut

Output in the eight key infrastructure industries declined in April for a second month in a row, by 0.4 per cent this time, posing a question over the recovery in manufacturing shown by the official gross domestic product (GDP) data. This rate of fall was the steepest in 18 months, since October 2013.

The eight industries, termed the core sector,  have about 38 per cent weight in the Index  of Industrial Production (IIP). None of the sectors, except coal, showed remarkable  growth. While five  recorded a decline in output, the growth in steel was  almost flat, only 0.6 per cent.  

The eight industries grew 5.7 per cent in April 2014 and fell 0.1 per cent in March 2015.

Core sector  industries and the IIP do not necessarily show one-to-one correspondence. For instance, IIP rose to a three-month high of 4.9 per cent in February, when core sector growth was only 1.4 per cent. In March, the eight industries contracted but IIP rose 2.1 per cent.

For the IIP to rise, the  remaining 62 per cent of the segment has to show quite remarkable  growth. Besides, electricity production undergoes one more revision between core sector data and IIP, and there is a mismatch  between steel data.

Experts said moderation in consumer price index (CPI) inflation would prompt the Reserve Bank of India to cut the policy rate on Tuesday but even that might not brighten the prospects for the core industries. CPI inflation for April eased to 4.86 per cent, the lowest in four months.

“The moderation in CPI inflation suggests a high likelihood of a repo rate cut in the June policy review. However, monetary easing is unlikely to brighten the outlook for most core industries, the performance of which is afflicted by factors such as supply-side constraints and the lack of competitiveness with respect to imports,” said ICRA senior economist Aditi Nayar.

Electricity generation fell 1.1 per cent in April versus  growth of 1.7 per cent in March, a sombre performance for a second month. This might impact growth of the industries.

Coal, the only exceptional sector, rose 7.9 per cent in April after six per cent growth in March  and a stupendous 11.6 per cent in February.

Output of all other industries declined — natural gas by 3.6 per cent, refinery products by 2.9 per cent, crude oil by 2.7 per cent, cement by 2.4 per cent and fertiliser by 0.04 per cent.

Official GDP figures issued last week showed manufacturing rose 7.1 per cent in 2014-15, against the advance estimate of 6.8 per cent, and 5.3 per cent in 2013-14.

"The core sector data for the first month of 2015-16 is quite disappointing. While the base effect does explain this movement, it nonetheless casts a semblance of a shadow on the expected growth this year," said CARE Ratings' chief economist, Madan Sabnavis, while also cautioning against interpreting a single month's data as an indication of things to come.