The output of core-sector industries dropped 1.3% in November — its sharpest contraction at least since the current series was introduced in April 2005 and compared with a 3.2% expansion in October — thanks to fewer working days due to Diwali and an unfavourable base, showed the official data released on Thursday. Although the data served to cap optimism generated in recent months about a spurt in industrial output, analysts said it should be viewed as a one-off shock — just like the euphoria over the 9.8% surge in the index of industrial production (IIP) in October — and doesn’t reflect the underlying momentum in the infrastructure sector.
The contraction in core output in November was mainly caused by the sharpest plunge in steel production in the current series (-8.4%), while crude production hit its lowest since August last year at -3.3% and natural gas touched its meanest since October 2014 at -3.9%. These three industries remained the worst performer since the beginning of the last fiscal. Domestic steel production has been badly hit by cheaper imports, especially after Chinese mills started dumping in the global market to cut huge inventory, analysts said. No wonder, the segment witnessed contraction for a fifth straight month in November.
Moreover, last year, Diwali fell in October (this year, Diwali was in November), so November had more working days, compared with the same month this year. Core sector growth, too, touched as high as 6.7% in November 2014, serving as an unfavourable base. The dismal performance of the core sector, a drop in merchandise exports and automobile production in November portends a sharp dip in industrial growth for November, after the IIP rose 9.8% in October, said Aditi Nayar, senior economist at ICRA. The continuing sluggishness in exports and rural demand, the narrow recovery in infrastructure and the relatively brighter outlook for urban demand continue to point towards moderate industrial growth in the second half of the current fiscal, she added.
The eight core industries–coal, crude oil, natural gas, petroleum refinery products, fertilisers, steel, cement and electricity — have a combined weight of almost 38% in the IIP. The core sector output during April-November period grew just 2%, down from 6% a year before, showed the data.
Although the mid-year review, released this month, claimed the economy was showing signs of a steady recovery, it highlighted the fact that the growth drivers are only private consumption and public investment, in contrast to the boom years from FY05 to FY12 when the economy was firing on all cylinders, including exports and private investments that have performed poorly. This, in turn, has affected industrial production and core sector output.
The latest data showed electricity generation remained unchanged in November from a year before, while fertiliser output rose 13.5% in November, against 16.2% in October. Closed factories during the festive season also weighed on the demand for electricity in November, which resulted in zero growth in generation in that month after robust expansion in September and October.
Mirroring poor construction activity, cement output plunged 1.8% in November from a year before, compared with a sharp rise of 11.7% — which was the highest growth since July 2014-in October. A drawdown in inventory is expected to support some uptick in cement growth in the near future, said analysts.
Crude oil production dropped 3.3% in November, compared with a fall of 2.1% in the previous month, while coal output grew just 3.5% against 6.3% in October. Refinery products witnessed growth of 2.5% in November, compared with -4.4% in October when some of the oil refineries, including the Vadinar unit of Essar Oil with a capacity of 20 million tonnes per annum, were shut for usual maintenance for some days.
Meanwhile, according to the Nikkei India Manufacturing PMI, the country’s manufacturing sector growth in November hit its lowest since October 2013, as fresh orders dried up. The index — a composite monthly indicator of manufacturing performance — stood at 50.3 in November, down from 50.7 in October. A figure above 50 represents expansion while one below that mark suggests contraction.