Growth in core infrastructure industries moderated to a five-month low in March at 3.6% year-on-year, partly due to the base effect but also because of unseasonal rains. Only two sectors — coal and crude petroleum — registered sequential improvement.
The data comes at a time when there is expectation of a slowdown in economic activities, but is at odds with other high frequency indicators such as the PMI and revenue from the Goods and Services Tax registering robust expansion in the month.
This is the slowest growth in core sector industries since October 2022 when it registered a mere 0.7% expansion. March’s core sector growth was also the second-lowest in FY23. The eight core industries grew by 4.8% in March, 2022 and by 7.2% in February, 2023.
On a cumulative basis, the core sector industries grew by 7.6% in FY23 as against 10.4% growth in FY22. Significantly, December’s provisional core sector data has been revised upwards to 8.3% from 7% with sharp revision in steel production.
Given that these core sectors have a combined weight of 40.3% in the index of industrial production (IIP), analysts expect IIP growth to also taper in the month to about 3-4% from 5.6% in February this year.
“Output of some of the sectors is likely to have been dampened by the unseasonal rainfall, such as electricity and cement, which displayed a year-on-year contraction in March 2023, along with crude oil. At the same time, coal, fertilisers and steel displayed a healthy expansion in excess of 8% in March 2023, which is encouraging,” said Aditi Nayar, Chief Economist, Head — Research & Outreach, Icra.
However, higher inflation, rising interest and easing of pent-up demand are also seen to be factors along with increased economic uncertainty that have hit domestic demand. The Reserve Bank of India left the repo rate unchanged at 6.5% in the last policy review earlier this month.
“The March data was weighed down by the base effect. Also, it seems that manufacturing activity was on the lower side in the month as electricity generation was negative. Usually, manufacturing tends to see an acceleration in the year end. However, across industries such as consumer goods, there is not too much traction in demand and there has been an overhang of inventory from the festival season,” said Madan Sabnavis, chief economist, Bank of Baroda.
In March 2023, the highest growth was registered in coal production at 12.2%, followed by fertiliser at 9.7% and steel at 8.8%. However, the growth in both fertiliser and steel production in March was lower compared to the 22.2% and 11.6% expansion, respectively in February this year.
The growth in fertiliser production is heartening and it indicates that stock have been exhausted and preparations are on for kharif season, Sabnavis noted.
Three sectors, including crude oil (-2.8%), cement (-0.8%) and electricity generation (-1.8%) registered negative growth in March. However, on a sequential basis, the de-growth in crude oil production eased from February’s -4.9% although March was the tenth consecutive month of contraction in the sector.
Natural gas production registered a growth of 2.8% last month while refinery products grew by 1.5%.
“While the growth of the core industries’ output rose moderately by 3.6% year-on-year in March 2023, the index rose to an all-time high due to the seasonal uptick in year-end activity with a strong sequential growth of 11.3% over February 2023.
Cumulatively, the growth in core sector output stands at 7.6% for FY23 which is fairly healthy considering the dilution of the base factor after the pandemic,” said Suman Chowdhury, Chief Economist and Head-Research, Acuité Ratings & Research. “With the weakening global and domestic demand, Ind-Ra believes that the growth in infrastructure industries would be under pressure in the ongoing fiscal year. As a result, the agency expects the core sector annual growth in FY24 at around 5%,” said India Ratings economists Paras Jasrai and Sunil K Sinha.