New numbers show dip in growth of core infrastructure sectors

The growth of eight infrastructure sectors contracted 0.5 per cent in August following broad-based deterioration in output across as many as five sectors, including cement and electricity. But for a turnaround in refinery products — the largest constituent of the core sector — and an uptick in the growth of fertilisers, the contraction in numbers would have been sharper.

The August numbers mark the first contraction in core infrastructure output since April 2019, pointing to the continuing weakness in demand conditions. While analysts expect the festival demand to push industrial growth, the Monetary Policy Committee (MPC) is likely to take note of weak demand conditions in its policy review on October 4 and cut rates.

The eight core sector industries had expanded by 4.7 per cent in August last year.

During the latest reported month, output of coal (-8.6 per cent), crude oil (-5.4 per cent), natural gas (-3.9 per cent), cement (-4.9 per cent) and electricity (-2.9 per cent) contracted while only production of refinery products (2.6 per cent), fertilizers (2.9 per cent) and steel (5 per cent) recorded a growth.

Given that private final consumption expenditure growth in June declined to its slowest in 18 quarters, there are expectations that the RBI could go beyond the 25 basis point cut to support growth. The index of industrial production (IIP) had grown 4.3 per cent in July from a downward-revised 1.2 per cent a month ago, according to data released last month.

Public Finance, India Ratings & Research (Fitch Group), said the contraction in output pointed to the weak demand conditions.

“Only refinery products, fertilisers and steel output increased in August 2019. All eyes are on festival demand to push industrial growth. The MPC will take note of weak demand, falling growth and low inflation in its monetary policy review on 4 October 2019. Ind-Ra expects a rate cut in October monetary policy review, however, the extent of cut could depend on the assessment of growth impact of policy measures announced by the government in past few weeks”.

Aditi Nayar, Principal Economist, ICRA Ltd, termed the performance of core sectors in August 2019 as “disappointingly weak” and indicated that “although the contraction in cement output was partly on account of a high base, this in conjunction with the moderation in the growth of steel output does not bode well for the pace of construction activities in Q2 (second quarter of ) FY2020”.

“The weak performance of electricity generation in August 2019 was driven by the contraction of 3.5 per cent in thermal electricity generation, in contrast to the moderately healthy expansion of 6.2 per cent in July 2019,” she said.

However, with the pickup in rainfall and reservoir storage levels, hydro electricity generation rose by 6.7 per cent in August 2019, after having reported a YoY stagnation in the previous month, Nayar said.

The RBI had projected GDP growth for the current fiscal at 6.9 per cent — in the range of 5.8-6.6 per cent for the first half of 2019-20 and 7.3-7.5 per cent for the second half. This could be further revised downward during its October policy review, given the lower-than-expected June quarter GDP growth.

Last week, the Manila-based Asian Development Bank had cut its growth forecast for India for fiscal 2019-20 to 6.5 percent from 7 percent projected two months ago.