The core sector in focus: Mean reversion

August 2020
The core sector in focus: Mean reversion

Among the core sector, cement index showed the maximum rebound, from a sharp drop of 85.3 per cent in April 2020 (virtually the entire month the production stopped), May rebounded to 21.4 (negative) and June came back to 6.9 per cent (negative).

Indian economy has shown striking resilience to revert to the mean, although it is early days to make any long term projection. But in the short term, the months of May, June and July have shown results that demonstrate the ability to make an economic recovery despite the headwinds that stem from the propagation of the Coronavirus in almost all corners of India.

It would be prudent to first see the state of the core sector. Monthly Core sector Index (which tracks monthly growth) has moved positively starting from a contraction of 37 per cent in April 2020, to 22 per cent in May and 15 per cent in June. So as we read June numbers it is in fact a recovery of 22 per cent over the steep drop in April, when the core sector Index fell to the crevice in absence of working days for production or sales.

Among the core sector, cement index showed the maximum rebound, from a sharp drop of 85.3 per cent in April 2020 (virtually the entire month the production stopped), May rebounded to 21.4 (negative) and June came back to 6.9 per cent (negative). Negative 6.9 per cent compares with negative 1.9 per cent in June 2019. Among the core sectors, only fertilizer (+4.2 per cent) and crude oil (-6 per cent) has fared better for the month of June.

To see some of the complementary sectors, coal, steel and electricity show some very mixed results. Coal is showing a very steady negative growth hovering around 15 per cent throughout these three months, while steel made a recovery from a steep fall of contraction of 78.7 per cent in April to negative 33.8 per cent in June. Electricity seems to be mode steady in its modest recovery from a contraction of 23 per cent in April to 11 per cent in June.

Core sector production growth has several components to be looked at, including other drivers for example in fertilizer, which due to the onset of the Kharif season coupled with higher distribution with easing of lockdown measures have aided output.

The Oil and natural gas sector have many other issues to contend with like ageing of assets, high prices of end use fuel dampening demand or the structural factors in Natural Gas, where the contraction is a 15 month consecutive phenomenon due to restricted gas off-take by consumers.

Minus the coronavirus, the core sector was showing an upward trend till march, barring a few, although the trend showed dampening due to some structural factors, some of which are related to also demand side of the story.

To project anything forward from this June series would be fraught with risks as we now move to the monsoon season and some sectors will have natural dampening of demand thus taming output, while the virus moves to an unknown trajectory. Some risks are multiplicative, while some are additive, how the economy wades through it will depend on how the economy tackles the virus as part of the economic rebound, not treating it as an exclusion (the treatment cannot be either or).

Construction and infrastructure hold the center piece of the discourse on core sector and this would mean solving the supply side, where labor remains the biggest influence for things to take shape. But actually the solution seems plausible that if those who could be vulnerable to contracting could be segregated and the rest could insulate themselves with a mandatory mask and strict regimen, the activities actually could be brought back to normal, albeit at a slightly reduced level. If the former, segregation through contact tracing and testing, is not well orchestrated among the various constituencies, while the latter, those who should protect themselves do not follow the rules, the combined result will continue to lead to the current trajectory of the virus.

The core sector also must have the solutions to the migrant labor problem, where the activities must reach a threshold to create the reverse movement of skilled labor in larger numbers. This remains a crucial result to watch, could the core sector create its own solutions, this is where some are doing better than the others, which includes solutions for distribution and logistics as well.

Procyon Mukherjee works as Chief Procurement Officer at LafargeHolcim India.
The ideas presented are his personal and have no connection to the beliefs of the company where he works.

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