September 2019: Core Sector Shrinks 5.2%

India’s core sector output contracted 5.2% in September, posting its worst performance in 14 years and suggesting that the economy may have slumped further in the second quarter of the current financial year.

Economists said the sharp contraction showed the severity of the industrial slowdown and a recovery may take time.

The data was released after the BSE Sensex climbed to a record level of 40,392.22, before closing lower at 40,129.05.

The Index of Eight Core Industries, which measures output in coal, crude oil, natural gas, refinery products, fertilisers, steel, cement and electricity, grew 4.3% in September last year. The estimate for August was revised to 0.1% from a contraction of 0.5% earlier.

These industries have a 40% weightage in the IIP, which may fall further from a 1.1% contraction in August, its worst performance in over seven years.

India’s economy expanded 5% in April-June quarter, the slowest pace in six years, and according to the Reserve Bank of India, is expected to clock a marginally better 5.3% in the July-September quarter. For FY20, growth is forecast to slump to 6.1% from 6.8% in FY19. GDP data for the July-September quarter will be released on November 29.

ICRA expects industrial growth to contract 2.5-3.5% in September. The official numbers will be released on November 11.

Recent data such as festive retail sales, currency in circulation and automobile sales suggests the economy may have bottomed out in the July-September quarter, picking up some pace in October, with the rally in the stock markets lifting sentiment.

RBI is expected to reduce rates again in December, given the deterioration in industrial activity. It has already cut the key repo rate by 1.35 percentage points in the current year.

The government has taken measures such as slashing corporate tax rates, infusing capital in banks, relaxing foreign direct investment limits for select sectors, supporting real estate and providing liquidity for nonbanking finance companies to lift growth.

All sectors in the core index, with the exception of fertilisers, posted a contraction. Coal, cement, steel and refinery products were impacted by the prolonged monsoon, Care Ratings said. Coal production fell 21% in September after an 8.6% drop in the previous month, adversely impacting electricity generation, which declined 3.7% in September against a 0.9% fall in August.

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