India’s core sector output contracted by 1.8% on year, for the first time in 42 months, in August, primarily owing to the statistical effect of a high base, official data released on Monday showed. In August 2023, the core sector’s output had grown 13.4%; and in July 2024, it had grown by 6.1%.
The y-o-y decline in output was contrary to expectations of around 2-3% growth during the month, say economists. Barring fertilisers and steel, the output of six other sectors–coal, crude oil, natural gas, refinery products, cement & electricity–contracted in August.
As per Aditi Nayar, chief economist, Icra, excess rainfall impacted mining activity, with the output of coal, crude oil, and natural gas declining, while also leading to a contraction in electricity generation in the month. “The decline in these sectors was accentuated by an elevated base, with a deficient rainfall in August 2023 supporting the output of these sectors in that month,” she added.
Economists say that excess rainfall and an adverse base are also likely to have weighed upon the output of the cement and the steel sectors, with the former reporting a y-o-y contraction, and the latter witnessing the slowest growth in 26 months. This depicts that construction activity weakened in the first two months of Q2FY25.
India Ratings and Research (Ind-Ra) said that the positive growth in steel production could be due to the inventory built by automobiles in view of the festive season.
Since the core sector has a weight of 40.3% in the Index of Industrial Production (IIP), the contraction in infrastructure sector output is expected to dent the industrial output as well. As per analysts, the IIP may witness a mild contraction of around 1% in August 2024.
Suman Chowdhury, chief economist, Acuite Ratings & Research expects the core sector output to pick up significantly from October with an acceleration in government spending on infrastructure projects. “Nevertheless, we expect a moderation in sector growth to 4.5%-5.0% in FY25 compared to 7.6% in FY24,” he said.