Core sectors contract in July by 9.6%


September 2020
Core sectors contract in July by 9.6%

During April-July 2020, the core sector output has contracted by 20.5 per cent as against the 3.2 per cent growth during the same months of FY20, which can be ascribed to the coronavirus pandemic induced nation-wide lockdown that brought production activities to a near standstill.

For fifth successive month, the output of eight core sectors contracted in July 2020 by 9.6 per cent when compared with the 2.6 per cent growth witnessed in the same month of the previous year. However, on a sequential basis, the output of eight core sector increased for fourth month a row and improved when compared with 12.9 per cent decline in June 2020. The partial increase in the output in the month of July 2020 can in part be ascribed to further relaxations in the lockdown restrictions permitted under Unlock 2.0. However, localised lockdowns imposed by states in certain parts have weighed on the output during the month. In the month of July 2020, barring fertilizers, all other industries have recorded a de-growth (yoy per cent).

The final index for April 2020 has been revised lower as a result of which the growth has been revised lower at -37.9 per cent as against -37 per cent (provisional). For June 2020, output growth has been revised higher to -12.9 per cent v/s -15 per cent (provisional).

During April-July 2020, the core sector output has contracted by 20.5 per cent as against the 3.2 per cent growth during the same months of FY20, which can be ascribed to the coronavirus pandemic induced nation-wide lockdown that brought production activities to a near standstill. All sectors barring fertilizers registered de-growth in industrial output during the first four month of FY21.

Key highlights:
Coal production declined by 5.7 per cent in July 2020 at a faster pace than the 1.6 per cent contraction in July 2019. However, when compared with June 2020 coal production has improved considerably (-15.5 per cent in June 2020). The partial resumption of industrial activities has led to increase in coal production. However, high inventory pile up and low pick up of coal stocks by electricity generation companies and monsoon season has weighed on coal production during the month.'

Production of crude oil contracted for the 4th successive month in July 2020 by 4.9 per cent on account of delay in production activities due to lockdown restrictions, non- availability of electric submersible pump (ESPs), delay in installation of new platforms, rise in water cut in wells & decline in total liquid production of wells, loss of oil production due to bandh/blockade by local people after the blow out at Baghjan and nearby areas.

Natural gas production declined for 16 months successively in July 2020 by 10.2 per cent as against 0.5 per cent de-growth in the same of last year. Delay in production activities due to lockdown, lower production from Vasistha/S1 wells due to surface issues and restricted/ no gas off take by consumers in onshore due to Covid-19 situation and shutdown at consumers' end weighed on production. Refinery production, having higher weightage in eight core, contracted at a double digit pace of 13.9 per cent higher than -0.9 per cent in July 2019 owing to lower demand in domestic and global markets due to impact of Covid-19 lockdown and ongoing monsoons.

Output of steel sector decreased at a double digit rate for fifth month in a row by 16.4 per cent compared with the 8.1 per cent growth in July 2019. It can be ascribed to subdued construction activities owing to monsoon and lockdown restrictions, low demand from auto sector with high inventories and muted demand.

Cement production witnessed a dip by 13.5 per cent, a successive de-growth for fifth month, due to subdued construction activities and high inventories in the real estate sector. The increased demand seen from the rural sector too moderated as the coronavirus infections penetrated in the rural India as well.

Output of fertilizers grew by 6.9 per cent in July 2020, higher than 1.5 per cent growth in July 2019 and 4.2 per cent in June 2020 as it was less affected by the shutdown and production continued as demand from agriculture was high. This demand along with replacement of stocks in advance for the rabi sowing later in October-November has partly contributed to this increase in production.

Electricity production fell by 2.3 per cent as against the 5.2 per cent growth witnessed in July 2019. On a sequential basis, however, it was higher than the 10 per cent contraction seen in the previous month. This reflects resumption of industrial and business activity leading to pick up in commercial demand which again gets reflected in similar patterns witnessed in coal.

CARE Ratings' View
In August 2020, further relaxation was permitted which is expected to push up the production by various key sectors during the month. The output thus may improve further in the eight core sector. Given the relationship between core sector growth and IIP growth (i.e., 40 per cent weightage of core sectors in IIP), the latter may be expected to be in the region of -12 to 14 per cent.

Courtesy: CARE Ratings

The article is authored by: Dr. Rucha Ranadive, Economist Email: rucha.ranadive@careratings.com | 91-22-68374348

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