July sees Core Sector Index slowing to 2.7%

NEW DELHI: After the high of first quarter GDP data, the core sector numbers for July and purchasing managers’ index for manufacturing (PMI) provided a sobering reality check that the recovery from the prolonged slump will not be easy as imagined.

The core sector index, which measures output of eight infrastructure industries, rose 2.7% in July, down from 7.3% in June, data released by commerce and industry ministry on Monday showed.

Separately, HSBC’s PMI showed manufacturing activity moderated in August, declining to 52.4 from 53 in July, though still well above 50-mark that indicates expansion. The Indian economy expanded 5.7% in the April-June quarter, a two-year high, triggering a raft of upgrades in the growth estimates for the full FY15 to as high as 6% by some analysts.

“The contraction recorded by five of the eight constituents of the core sector in July 2014 highlights that the uptick in economic growth in the first quarter of the fiscal does not signify the start of a broad-based revival in growth momentum,” said Aditi Nayar, senior economist, ICRA.

Core sector index has 38% weight in the index of industrial production ( IIP), indicating that the 3.4% growth in industrial production may not sustain in July.

The eight infrastructure industries included in the core sector index are coal, electricity, crude oil, natural gas, steel, cement, fertilizers, and refinery products. However, the sectoral details showed the core sector number in a better light and PMI was still in a strong expansion zone.

“Manufacturing activity moderated following a spurt in the previous month. Output and new orders slowed slightly in August, but remained robust relative to their 12-month history,” said Frederic Neumann, Co-Head of Asian Economic Research at HSBC, and added that the mood remains positive, with firms accumulating inventory in response to stronger demand.


Output in crude oil, natural gas, refinery products, fertilizers and steel contracted by 1%, 9%, 5.5% 4.2% and 3.4%, respectively.

Notably, coal output rose 6.2% in July, indicating that the supply growth was stabilizing in higher single digits. And cement production rose 16.5% in July, indicating a strong revival in construction activity. Even the 3.4% contraction in steel production was on a high base of 18.1% growth in July 2013.

Electricity generation was up 11.2%, hinting adequate power for industry that was showing signs of revival, though Nayar felt it may be difficult to sustain.

“Though the core sector data is not encouraging, cement and electricity have performed exceptionally well, which is a good sign for economic growth going ahead. After September, we may see a fullblown recovery taking place in all sectors besides natural gas,” said Soumya Kanti Ghosh, chief economic adviser, SBI.

PMI data also had something to cheer in the details.

Output at Indian manufacturing companies rose for a tenth straight month in August, and at the second-sharpest rate since February 2013 on account of improved order book volumes, the report said.

However, price pressures remained elevated, despite the slight deceleration seen in input prices. “This is likely to keep the central bank guarded against inflation risks, particularly from the pickup in demand,” said Neumann.

The Reserve Bank of India had kept the interest rates unchanged in August.