Core sector output worst in 52 months; MPC may cut rates to prop up growth

The crucial eight-industry core sector output fell by 0.5 per cent in August for the first time in 52 months, prompting economists to believe that the Reserve Bank of India's (RBI’s) monetary policy committee (MPC) will cut the policy rate for the fifth time in a row later this week to prop up the economic growth. 

The sector had grown 2.7 per cent in the previous month. This was revised up from the initial calculation of 2.1 per cent, which was at a 50-month low. 
 

Growth in August last year stood at 4.7 per cent and hence there was not much high-base effect. 

Five of the eight industries — coal, crude oil, natural gas, cement and electricity — contracted in August. Just three industries — refinery products, fertilisers and steel — grew in the month. 

The core sector growth stood at 2.4 per cent during the first five months of the current financial year, lower than the 5.7 per cent a year ago. 

Since core sector has 40 per cent weight in the index of industrial production (IIP), its growth may be subdued in August. 

“IIP growth will tend to be anemic in August, as there has been less growth seen in the consumer and capital goods segment,” CARE Ratings said in a note. 

While negative growth cannot be ruled out, there is a chance of growth being in the 1-2 per cent range, given the statistical base effects, the note said. 

“We continue to expect the MPC to cut the repo rate by 25 bps in the upcoming October 2019 policy review,” Aditi Nayar, principal economist at ICRA, said. 

CARE Ratings said the negative growth in August does indicate stagnation in the government infrastructure spending, thereby meaning that its efforts to prop up investment has been limited. 

While 8.6 per cent fall in the coal production was a three-year low, electricity declined by 2.9 per cent, a 6.5-year low. 

CARE Ratings said lower demand from the power sector has led to a contraction in the coal production. 

Cement production recorded a fall of 4.9 per cent, a 28-month low on account of a higher base and monsoon. 

Besides, crude oil, natural gas have also contracted. 

Fertiliser production has seen a sustained improvement in the previous three months, and was at a five-month high owing to restocking activities ahead of the rabi sowing season. 

Steel production growth moderated to a six-month low of five per cent in August, 3.9 percentage points lower than the previous month. 

“This growth is positive for the industry but not adequate. Government spending on railways and to an extent urban development has accounted for this growth,” CARE Ratings said. 

Refinery products, which is the largest constituent of the core sector, recovered to a growth of 2.6 per cent against 0.9 per cent contraction in the previous month. 

India’s economic growth declined to an over six-year-low of five per cent in the first quarter of 2019-20. In the new methodology of computing gross domestic product, IIP constitutes around 25 per cent to industry gross value added in the quarterly estimates.