Core sector logs 3.4% growth, its poorest show in 11 months

NEW DELHI: The six core sector industries grew at the slowest pace in eleven months at 3.4% in June from a year ago, confirming fears that the ebbing shift in industrial growth that surfaced last month is for real.

Factory output eased to 11.5% in May, the slowest in seven months, after which experts said the country is headed for waning industrial growth. The latest infrastructure numbers released by the government seem to validate their thinking because crude oil, petroleum refining, coal, electricity, cement and finished steel have a combined 26.7% weight in the index of industrial production, or IIP.

The core sector data is released about two weeks before the IIP figures are. IIP data for June are due on August 12.
“The June core sector numbers are considerably weaker compared to earlier data and suggest that the IIP figures for the month is likely to register a single digit growth,” said Sonal Varma, economist at Nomura Holdings.

Within the core sector, cement and steel are considered better indicators of industrial activity as they are vital to a number of industries. Their production moves in line with the demand from industries dependent on them.

Cement production increased 3.6% in June from a year ago, again at the slowest clip in 22 months. The data are a pointer to a drop in the construction activity.

Production of finished steel increased 3.5% in June, but it is difficult to read much into these numbers given the erratic growth in recent months. After peaking to 15.3% in January, steel production fell to 0.9% in February, only to rise the next month to 9.2%.

“A lot of the sectoral production data is getting skewed because of a base effect. For instance, finished steel was growing at double digits in 2009,” said Ms Varma.

Sunil Sinha, head of research and senior economist at rating agency, Crisil, said the decline could be an aberration.

“Some of the decline in production is cyclical as with the arrival of the monsoon, construction activity goes down. This would explain the lower growth in sectors like cement, steel and coal, he said.”

The sluggish growth in production of others four products — crude oil, petroleum refining, coal, electricity — points to supply-side issues.

There is a shortage of all these products and a below-par growth indicates a greater reliance on imports or a drag on production.

“If this trend (slow growth) continues, it can create a bottleneck for overall industrial output as many of the core sectors like electricity and cement are essential raw materials,” Mr Sinha said.

Between April and June, the six core industries grew 4.6% against 4.3% a year earlier. In June 2009, the six core industries grew by 6.3%.