Core sector slides to four-year low

Written by Economy Bureau | New Delhi | Updated: Mar 8 2009, 05:28am hrs
Core six growth
The prospect of a revival soon in factory output dwindled with the infrastructure sector turning in just 1.4% growth in January, far below the 3.6% recorded in the same month last year.

This is the worst monthly performance since December 2005, according to government figures released on Friday. The core sector six-cement, coal output, electricity, finished steel petroleum refinery products and crude oil-contribute 27% to overall industrial production.

Other ways of gauging industrial output are just as discouraging. Non-oil imports, accounting for around three-fourths of industrial inputs, contracted by 0.5% in January. Similarly, commercial vehicles registered 52% negative sales growth in January 2009, only marginally better than the 58% shrinkage that was seen in December.

Government officials have exuded optimism about industrial production inching back into positive territory in January. Department of Industrial Policy & Promotion secretary Ajay Shankar had predicted last month that thanks to automobile, steel and cement companies showing signs of strength, there is positive (IIP) news in January numbers.

The IIP had shrunk for the first time in 15 years in October 2008. In November, it showed signs of some recovery by registering a 1.7% growth, but then contracted by 2% in December, against a growth rate of 8% in the same month a year earlier.

The slump in infrastructure industries bears out India Incs argument that without a substantial lowering of interest rates by banks, there would be little rise in credit off-take. RBI data released on Wednesday showed that from mid-December to mid February, credit to industry from the banking sector grew by only Rs 8,000 crore, against Rs 87,000 crore in the same period last year.

Of the core sector six, cement at 8.3% growth registered the best performance in January, against 5.6% in the same month last year. The worst performance was registered by crude oil production, which shrunk 8.1% in January from -0.2%. For the April-January period, overall growth slipped to 3.2%, from 5.7% a year earlier.

The weakness in core sector growth reflects the inability of the government to implement any capacity expansion programmes in infrastructure. It could have expedited programmes like highway construction, electricity generation and transmission. This is not a derived demand. Such effective implementation of these programmes could have become the growth engine, but we see governance weakness, said Indian Council of Research in International Economic Relations director & CEO Rajiv Kumar.

Vinayak Chatterjee, chairman of infrastructure consultancy firm Feedback Ventures, said, The infrastructure constraints are growing more worrisome by the day. Unless fresh capital investments are made, the situation is unlikely to improve further.

Nomura economist Sonal Varma agrees. Though coal and cement sectors have done well, crude oil production has remained weak. When seen together with the slowdown that we saw in auto production in January, we are expecting IIP growth to be 0.3%. But this will be better than the December 2008 figures.