India’s core sector output contracted for the first time in nearly four years by 1.8 percent in August compared with 6.1 percent growth witnessed in the previous month owing to a high base, according to data released by the government on September 30.
The sector had expanded 13.4 percent in August 2023.
"The entire performance has been skewed due to the base effect of high growth last year," said Madan Sabnavis, chief economist, Bank of Baroda.
This represents a marked slowdown in growth to 4.6 percent for the first five months of the year at 4.6 percent, from eight percent during similar period in the previous year.
Experts indicate that this is likely to have significant bearing on industrial production, especially as manufacturing activity has slowed over the last month.
"Given these trends, ICRA expects IIP growth to slow down sharply to around 1 percent in August 2024 from 4.8 percent in July 2024," said Aditi Nayar, chief economist, Icra.
India Ratings and Research economist Paras Jasrai also placed expectations of below 1 percent industrial production growth in August.
"Core sector output may remain lacklustre in September 2024 given the late withdrawal of the monsoon, before normalising in Q3 FY2025," Nayar noted.
The combined Index of Eight Core Sector Industries has a 40 percent weight in the Index of Industrial Production and measures the output of key sectors - cement, coal, crude oil, electricity, fertilisers, natural gas, refinery products and steel.
IIP is likely to track closely with PMI numbers. India’s manufacturing PMI had slumped to a three-month low of 57.5 in August compared with 58.1 in the previous month, as demand had softened.
Broad-based decline
Six of the eight sectors witnessed a contraction during the month, according to data released by the government on September 30, with coal and electricity sectors witnessing the sharpest decline. Both coal (-8.1 percent) and electricity output (-5 percent) were at a 50-month low.
"The contraction was the sharpest in coal and electricity sectors in August 2024 due to the swift progress of monsoon rainfall in the country which resulted in lower power demand," Jasrai noted.
While the fertilisers and steel retained positive growth at 3.2 percent and 4.5 percent, respectively, growth was at a two month low for fertilisers and 26-month low for the steel industry.
"The capex of the general government also helped the production growth in the sector. The capex of the union and 21 state governments was up 10.5 percent yoy to Rs 0.88 trillion in August 2024," said Jasrai.
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