Ominous contraction 

#GS3 #Economy  

Steepest fall in core sector output in at least 8 years portends protracted economic pain 

  • The provisional figures released by the Commerce Ministry show that production at all but one of the eight industries comprising the core sector shrank in March from a year earlier, resulting in the sharpest contraction in the index since the new series began in April 2012.   
  • That output contracted by as much as 6.5% in a month when most economic activities ground to a halt only in the last seven days, is a worrying augury.   
  • While output at petroleum refineries slid only by a marginal 0.5% as a bulk of the transportation sector was idled only in the last week of March, the 7.2% and 13% contractions in electricity and steel production, respectively, reflect the underlying stress in the economy, most crucially on the demand side.   
  • With all non-essential industries and commercial establishments ordered shut as part of the lockdown, demand for electricity declined by more than 9% in March, according to data from the National Load Despatch Centre.   
  • While the power sector has been exempt from the lockdown because of its essential nature, the slump in demand from commercial customers is bound to have a significant sector-wide cascading impact as a result of heightened cash flow problems at the already stressed distribution companies that deliver electricity over the last mile to consumers.  
  • Coal, the only sector to post a positive figure in March as output expanded 4%, also presents a far from reassuring picture as growth slowed sharply from February’s 11.2% and was less than half the 9.1% pace seen in March 2019.   
  • And with demand for coal from user sectors spanning thermal generators and the key process industries of steel and cement unlikely to revive any time soon, production of the crucial commodity is very likely to shrink in April.   
  • With the construction sector hit hard by the lockdown and likely to face serious labour supply issues even after the economy gradually reopens, cement may see production shrink in the first month of the new fiscal year by an even greater extent than the 25% drop seen in March.   
  • The mayhem in the oil market with global crude prices tumbling is also certain to undermine the industries in the energy sector. Undoubtedly, April’s overall core output appears headed for an even sharper contraction.   
  • And with the eight major industries having a weight of 40.3% in the broader Index of Industrial Production, it is certain to drag industrial output as a whole into negative territory.   
Print Friendly and PDF
blog comments powered by Disqus