Core sector contracts 1.8% in a first in 42 months, shows govt data

For the first time in 42 months, the output of India’s eight key infrastructure sectors saw a 1.8 per cent year-on-year (Y-o-Y) contraction in August, data released by the Department for Promotion of Industry and Internal Trade (DPIIT) on Wednesday showed.

The contraction can be attributed to a high base as well as monsoon impacting industrial activity. The growth in the output was 6.1 per cent in July 2024 and 13.4 per cent in August 2023.

The eight sectors — coal, steel, cement, fertilisers, electricity, natural gas, refinery products, and crude oil — comprise two-fifths of India's total industrial production. As a result, they have a significant impact on the index.

Barring steel and fertilisers, which saw growth of 4.5 per cent and 3.2 per cent, respectively, the remaining six sectors witnessed contraction.

Aditi Nayar, chief economist at ICRA, said that excess rainfall impacted mining activity, leading to decline in the output of coal, crude oil, and natural gas, and also a contraction in electricity generation in the month.

“Excess rainfall and an adverse base are also likely to have weighed upon the output of cement and steel sectors, with the former reporting a Y-o-Y contraction and the latter witnessing the slowest growth in 26 months. The performance of these sectors during July-August 2024 suggests that construction activity weakened in the first two months of Q2FY25,” Nayar said.

She expects core sector output to remain lacklustre in September, given the late withdrawal of the monsoon, before normalising in the third quarter of the current financial year (FY25).

Coal contracted 8.1 per cent in August while electricity generation witnessed 5 per cent decline. Production of natural gas, crude oil, refinery products and cement witnessed 3.6 per cent, 3.4 per cent, 1 per cent, and 3 per cent contraction, respectively, in August.

Paras Jasrai, senior analyst at India Ratings, said that the contraction was the sharpest in coal and electricity sectors due to the swift progress of monsoon rainfall in the country, which resulted in lower power demand. Cement and refinery products contracted due to the adverse impact of high base.

“The positive growth in steel production could be due to the inventory built by automobiles in view of the festive season. The capex of the government also helped production growth in the sector,” Jasrai said.

Economists pointed out that this may also result in a slowdown in the index of industrial production (IIP) for the month of August. “ICRA expects IIP growth to slow down sharply to around 1% in August 2024 from 4.8% in July 2024,” Nayar said.