Economy

Published: Dec 29, 2021
Updated: Dec 29, 2021

Core Sector growth in July: Growth is up but not yet at pre-pandemic level

The output of the eight core sectors grew by 9.4% in July 2021, this growth coming against a contraction of 7.6% in July 2020. The monthly index was higher by 1.1% in comparison to the pre-pandemic level of July 2019. The core sector output for June 2021 has been revised upwards from 8.9% to 9.3%. On a sequential basis, the core sector output grew by 5.4%. This improvement can be viewed in the context of the slow resumption of economic activities across states with the subsiding 2nd wave of Covid-19 towards the end of the first quarter of FY22. There has been a broad-based yoy growth across all sectors except crude oil. Growth in cement and steel output, backed by the infrastructure push by the government, has driven growth during the month. Sequentially, all sectors have witnessed an improvement over the previous month.

During the first four months of FY22, the core sector witnessed double-digit growth of 21.2% vis-à-vis -19.8% in the corresponding period of the previous year. The cumulative index for the period so far in FY22 is lower by 2.8% than the index for the corresponding period in FY20, prior to the onset of the pandemic. This is indicative of the fact that though the economy has been showing signs of improvement, it is still far from achieving the pre-pandemic levels of industry activity. Natural gas, steel and cement have witnessed double-digit growth purely on account of a base-effect phenomenon.

Coal production witnessed double-digit growth of 18.7% in July 2021 as against a contraction of 5.7% in July 2020. This growth in coal output can be ascribed to the revival in demand from the power sector amid easing of restrictions across states in July 2021. Growth is up but not yet at pre-pandemic level Core Sector growth in July 30 Corporate India September 15, 2021 Crude oil production recorded a 3.2% contraction compared with - 4.8% in the same month last year.

Less-than-planned production by government companies can be attributed to delays in inputs and installation of wellhead platforms on account of Covid-19, and less- thananticipated contribution from workover wells, drilling wells and old wells. Production by private/JV companies was lower on a yoy basis due to injectivity and reservoir issues and delays in commencement of production.

Natural gas production was higher by 18.9% in July 2021. This double-digit growth comes against a low base of -10.2% in July 2020. This growth number masks the lower-than-anticipated natural gas production in government fields as well as by private/JV companies, mainly on account of reservoirrelated issues and delays in well completion and commencement of gas production. Also, low upliftment of gas by major customers has dampened the natural gas output during the month.

REFINERIES PICK UP

Refinery production registered a growth of 6.7% over negative growth of 13.8 in the same month last year. This improvement is indicative of the slow resumption of economic activities and the resultant revival in demand, coupled with higher exports to the Gulf.

Fertilisers production grew at a subdued rate of 0.5% compared with 6.9% in July 2020. The growth in this sector can be attributed to sowing season demand and restocking of fertilisers ahead of the rabi season which begins around October-November.

Steel output has not only witnessed a yoy growth of 9.3% but it has also recorded a sequential improvement of 1.5% over the previous month. Steel-producing units diverted oxygen for medical purposes to meet the sudden surge in oxygen requirements by the healthcare sector during the initial months of FY22.

The growth in steel output is indicative of the recovery from the challenges faced amid the 2nd wave of Covid19. This sector is likely to get a boost from the several steps undertaken by the government to ramp up steel production.

Cement production grew by a robust 21.8% against a low base of -13.4% in the corresponding month last year. The renewed momentum in construction activities and government spending on infrastructure has boosted the output in the steel and cement sectors.

CARE Ratings’ view

As expected, the base effect phenomenon continues to hide the actual yoy growth in the core sectors. On a positive note, the mom improvement in output of core sectors, viewed alongside other crucial economic indicators such as GST collections, e-way bills, and manufacturing PMI (which was back in expansion territory in July 2021) hints at signs of economic recovery.

The core sector output accounts for around 40% weight in the IIP basket. On account of the strong core sector performance in July 2021, we expect the growth in the index of industrial production to be in the range of 12-14%.