Eight core sector growth rises to 3.6% in May

Activity in the core sector picked up in May, with a sharp rise in the output of natural gas, electricity and refinery production helping offset underperformance in coal and steel.

The index of eight core industries rose 3.6% in May, compared with a 2.8% gain in April, according to data released on Friday. For April-May, the first two months of this fiscal year, the cumulative growth was 3.2%. Economists expect it to moderate in the coming months, partly due to rains. Investment demand is not recovering. Moreover, construction activity will slow down as the monsoons progress. In such a scenario, it is unlikely for the core sector to show any significant growth in the coming months.

The core sector index gauges output of coal, crude oil, natural gas, refinery products, fertilisers, steel, cement and electricity. It has a 40.27% weight in the index of industrial production (IIP).Electricity production and refinery output both posted five-month high growth of 6.4% and 5.4%, respectively.

Only two infrastructure sectors showed a decline in output. Coal production fell 3.3%, while fertiliser output dropped 6.5%.Unfavourable base effect and lower offtake hit fertiliser production. Fertiliser output had last shown a steeper decline in September 2014, when it fell 9.5%.

Crude oil output rose a meagre 0.7%, compared with a 0.6% decline in the previous month. Steel output rose 3.7%, but the growth was slower than the previous month's 9.3% rise. Cement output gained 1.8% compared with a 2.4%decline in April. It could be a signal of a turnaround in construction activity, driven by a pickup in the housing and infrastructure segments, particularly, road and irrigation.

IIP IMPACT 

The mild recovery in the core sector could pull up industrial growth, which was expected to take a hit due to the rollout of goods and services tax. Industrial production had increased 3.1% in April. There have been reports that manufacturers have cut production before the roll out of GST on July 1, preferring to deplete the inventory of existing goods before starting fresh production under the new tax regime The May IIP growth is likely to suffer also because of the high base of last year. Industrial production had expanded 8.6% in May 2016.