Led by a continuing low-base effect, the combined output of the eight core sector industries rose by 16.8 percent in May, as compared to a year ago. Core sector output had risen by a massive 60 percent in the previous month of April.
The data released by the commerce and industry ministry on June 30 showed production declined in two out of the eight core sector industries - crude oil and fertilisers.
The eight core industrial of coal, crude oil, natural gas, refinery products, steel, cement, fertiliser and electricity have a combined weight of over 40 percent in the Index of Industrial production, or IIP.
“With the base becoming less distorted and the widening of state-wise restrictions, the core sector expansion expectedly flattened in April 2021. Additionally, the core index in May 2021 was a substantial 8% lower than the pre-COVID level of May 2019, led by all the components except natural gas," Aditi Nayar, Chief Economist, ICRA, said.
In May, production of finished steel rose the highest, rising by nearly 60 percent due to the low-base effect. Most smelters and steel factories were closed in May, 2020 owing to the nationwide lockdown. The performance of steel which was likely to have been driven by healthy exports, exceeded forecasts, Nayar added.
Elsewhere in the infra space, cement production also rose by 7.9 percent as compared to the year-ago period. "Even though construction activities were allowed amidst the state restrictions, the cement sector saw the largest sequential moderation in May 2021 (17.6 percent), as well as the deepest pace of contraction relative to May 2019 (15.2 percent)," Nayar pointed out.
This may reflect the impact of the second COVID surge on rural demand, as well as the year-on-year decline in the government's capital outlay in May 2021, she added.
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.
In the energy space, crude oil production continued to contract. Crude production has reduced for more than 14-months now. A similar entrenched slowdown was also experienced by the petroleum refining sector till March. The growth figures in March and April are thought to be the result of a low-base effect.
India's oil demand had fallen in the initial days of the pandemic due to the nationwide lockdown closing down factories. Before that, the continued contraction had led to experts suggesting the deep lack of demand was symptomatic of sustained slowdown in overall industrial activity.
However, after rising suddenly in March, natural gas production has continued to climb up. Gas production rose by 20 percent in May, after a 25 percent rise in April. May saw a similar story for coal production as well, which rose by 6.9 percent after the 9.5 percent rise in April.
Interestingly, electricity output, rose by 7.3 percent in May, after rising by 38.5 percent in April. It had risen a substantial 21.2 percent in March as well. Electricity production is generally tied to coal output given the large share of coal fired thermal manufacturing in India's electricity generation grid.
Finally, the fertiliser sector, which had beaten the contraction pangs even in the peak of lockdown, contracted in May, showing a 9.6 percent reduction in output. The sector had entered a contractionary phase since February.
The core sector data is released about two weeks before the IIP figures, pertaining to overall industrial output are put out. IIP figures for May will be announced on July 12.
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