Notwithstanding the phased easing of Covid-19 lockdown, the eight core sector industries’ output contraction deepened to 8.5 per cent in August, official data showed on Wednesday.

This is the sixth straight month of contraction since March when the core industries contracted 8.6 per cent. For the April -August 2020 period, core sector output contracted 17.8 per cent.

The sequential worsening in the core sector’s performance in August as against the revised 8 per cent contraction in July is being seen in certain quarters as a sudden stalling of the recovery momentum since May. Core sector output had contracted 12.9 per cent in June and 21.4 per cent (revised) in May. In August last year, the contraction was 0.2 per cent.

The eight core industries are coal (3.6 per cent), crude oil (-6.3 per cent), natural gas (-9.5 per cent), refinery products (-19.1 per cent), steel (-6.3 per cent), electricity (-2.7 per cent), cement (-14.6 per cent) and fertilisers (7.3 per cent). Fertilisers and coal were the only two sectors that showed output growth in August.

Intermittent setbacks

Aditi Nayar, Principal Economist, ICRA, pointed out that the sequential worsening in August was led by deeper de-growth in refinery products, crude oil, electricity and cement, even as coal recorded a turnaround to a growth in that month, the pace of expansion of fertilisers improved, and the contraction in natural gas and steel eased relative to July.

The sharp dip in the contraction in refinery products imposed the chief drag on the performance of the core sector, and serves as a reminder that there may be intermittent setbacks before the economy fully recovers from the impact of the ongoing crisis, she said.

“While the pace of contraction in non-oil merchandise exports and the core sector worsened, auto output recorded a considerable recovery in August relative to the previous month, led by pent up demand and inventory restocking. Based on these mixed trends, we expect the contraction in the Index of Industrial Production (IIP) to ease modestly to 6-8 per cent in August, from the initial 10.4 per cent in July,” Nayar said.

Madan Sabnavis, Chief Economist, CARE Ratings, said the slightly higher fall in core sector growth does indicate that the declining trend in negativity has been paused. Six out of the eight segments have shown negative growth which was on expected lines. “Positive growth in fertilizers can be linked directly with good farm prospects and companies have been ramping up for the rabi sowing. Increase in coal production is a positive as it can be linked with building up reserves which have been declining over the months. Also, the return of labour can be surmised from this growth rate in this field,” he said.

After four months of contraction, coal output posted a modest 3.6 per cent y-o-y growth in August, benefitted from a mild improvement in the offtake levels as well as the favourable base effect.

Cement and steel displayed contrasting trends in August, with heavy rains arresting construction activity, even as inventory restocking in the auto sector boosted steel demand.

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