India’s core sector growth slowed to 6.3% in May, a decline from the revised 6.7% in April, according to the latest government data released on June 28. This slight dip is attributed to the ongoing contraction in the cement industry, despite increased output in coal and electricity sectors. Experts believe this moderation in India’s core sector growth will likely impact overall industrial output.
Aditi Nayar, chief economist at Icra, highlighted that factors such as the heatwave and the phased Parliamentary Elections may have curtailed activity in certain sectors. The combined Index of Eight Core Sector Industries, which includes cement, coal, crude oil, electricity, fertilizers, natural gas, refinery products, and steel, holds a 40% weight in the Index of Industrial Production (IIP). Experts predict that the IIP growth in May 2024 will be around 4-5%, reflecting this moderation in India’s core sector growth.
Sequential growth in the index representing infrastructure output was up by 3.7%. However, there was a mixed performance across sectors. Three of the eight industries contracted in May, compared to two in April, with growth slowing in three other sectors.
Electricity production saw a notable increase of 12.8% in May, up from 10.2% in April, while coal output expanded by 10.2%, compared to 7.5% earlier. The heatwave is believed to have driven higher demand for electricity and coal.
According to Madan Sabnavis, chief economist at Bank of Baroda, the 12.8% growth in the power sector was primarily due to increased demand caused by the heatwave. This higher demand also boosted coal production as more power generation required increased coal output.
Conversely, the cement and fertilizer sectors continued to contract, with reductions of -0.8% and -1.7% respectively. This marks the fifth consecutive month of contraction for fertilizers and the second for cement. Additionally, the crude oil sector saw a downturn in May after four months of positive growth.
Economists Paras Jasrai and Sunil K Sinha from India Ratings and Research (Ind-Ra) noted that the output levels of coal, crude oil, and refinery products were only up by 7.9%, 3.0%, and 10.0%, respectively, compared to pre-COVID levels. They suggested that a sustained, broad-based recovery in India’s core sector growth is still some distance away.
The data was released just days before the government is set to present its first budget. Experts predict that the government will continue to emphasize capital expenditure (capex), which is expected to further stimulate infrastructure growth.
States are anticipated to front-load their capex, similar to the previous year, which would benefit the construction and infrastructure sectors. Ind-Ra economists forecast core sector growth to be around 6% in June 2024, factoring in the tax devolution to states during that month.
One industry demand is to increase capex spending to 25% of the previous year’s expenditure of Rs 9.5 lakh crore, compared to the 17% outlined in the interim budget.
India’s growth prospects appear promising, with the Reserve Bank of India recently revising its growth forecast for FY25 upward to 7.2% from the previous 7%. This upward revision reflects optimism in overcoming the current challenges in India’s core sector growth.