Core sector output shrinks for fourth straight month in June, down 15%

Infra segment, refinery product impacted the most, even as contraction narrows in latest month

Topics

Core Sector output | July core sector output | Lockdown

The output of the eight core sectors of the economy shrank 15 per cent in June, against 22 per cent in the previous month, as industries battled the demand slump and labour and cash shortages owing to the nationwide lockdown.

Experts say the aftershocks of the lockdown continued to weigh on domestic industry, even as an uneven recovery started taking shape. Icra predicts overall industrial production to contract 15-20 per cent in June, while CARE Ratings pegs it at a negative 20-22 per cent.

“The slightly positive factor is that the decline in growth has improved. Clearly as the government started permitting more economic activity there was some signs of production taking place even though at much lower levels,” said Madan Sabnavis, Chief Economist at CARE Ratings. However, the updated figures released by the Commerce and Industry Ministry on Friday showed seven of the eight core sectors continued to contract in June, same as the previous month.

The infrastructure segment continued to see the biggest production shocks. The already volatile steel and cement sectors have been badly affected by the pandemic as social-distancing norms have meant that construction has been suspended across the country. Steel production remained the worst performing sector for the second month in a row, contracting by 33 per cent in June, after tumbling by 43 per cent and 79 per cent, respectively, in the previous months. On the other hand, cement production managed to quickly cut its losses as June output shrank by a much smaller 6.9 per cent. This is significant considering the sector had seen a 85.3 per cent drop in April.

ALSO READ: Low fuel demand drives IOC’s pre-tax profit down 42% to Rs 3,204 cr in Q1

“The differential performance of cement and steel suggest that construction activity has resumed at a faster pace in rural areas relative to urban areas, and that production of consumer durables continues to lag the recovery seen in other sectors,” said Aditi Nayar, principal economist, Icra.

Cutting losses

In June, the production of refinery products — a key export item — also continued to be in the negative as imports sagged. Output fell 8.9 per cent after contracting 21.3 per cent in May. The sector had remained volatile throughout FY20, but senior officials had said solid recovery in production was underway as key refining units pushed out more. The sudden drop in global demand, as the pandemic stifled economic activity everywhere, led to a contraction in the sector, experts said.

Elsewhere in the energy space, crude oil production continued its downward spiral for the 21st month on the trot. Production reduced by six per cent in June after contracting 7.1 per cent in the previous month.

ALSO READ: Retail inflation for industrial workers marginally eases to 5.06% in June

Natural gas production also contracted for the 15th straight month, reducing by 12 per cent after the 16.8 per cent fall in May.

Coal output was the only sector to see a worsening scenario with production reducing by 15.5 per cent in June, slightly more than May’s 14 per cent, partly reflecting the lagged impact of subdued coal offtake levels. Overall, the fact that labour was in transit camps meant activity in mining got affected.

By extension, electricity generation als contracted albeit at a slower pace. “As the economy started to unlock, the pace of YoY contraction in electricity generation declined to 11 per cent in June 2020 from 14.8 per cent in May, led by both thermal electricity generation and hydro electricity generation. Subsequently, the contraction in electricity consumption has eased further to a muted 3 per cent in July 2020,” added Nayar.

Finally, fertiliser output remained the only sector which has continued to grow, even as production rose by 4.2 per cent, lower than the 7.5 per cent rise in May. Experts held ample rainfall and brisk start to kharif sowing to be responsible.