From bad to worse: On core sector output

Contraction in core sector output indicates that recovery is still far away

November 02, 2019 12:02 am | Updated 12:11 am IST

Hopes of a quick turnaround in the economy have turned out to be quite premature in light of the latest set of economic data released on Friday. The Commerce and Industry Ministry reported that core sector output, which is measured by tracking the performance of eight major industries including cement, steel, and crude oil, contracted by a sharp 5.2% in September. This is its worst fall in 14 years. Seven out of the eight core industries witnessed a contraction, with the coal sector being the worst hit, shrinking by over 20%. The latest figures are in stark contrast to core sector growth of 4.3% reported during the same month last year. Given that core sector contraction was only 0.5% in August, the trend points towards a worsening of the economic situation. At the moment, it seems quite likely that gloomy core sector performance will affect GDP growth in the second quarter as well as the full financial year. It is worth noting that while a few high-frequency data points had shown some signs of a nascent revival in the economy in September, most still remain mired in a slump. Plus, the present contraction in the core sector, which represents the capital base of the economy, suggests that the negative effects of the fall in consumption are spreading across the entire production chain.

In further bad news, data released by the Centre for Monitoring Indian Economy showed that unemployment in October rose to a three-year high of 8.5% in October. This marks a sharp jump from 7.2% in September. If growth fails to pick up, the unemployment scene could get ugly and further contribute to the demand slowdown. What is even more worrying is the fact that the current slowdown comes in the midst of a spree of aggressive rate cuts amounting to 135 basis points by the Reserve Bank of India since February this year. Lending in the festival season has picked up with banks extending over ₹1 lakh crore in the period between mid-September and mid-October. Yet, growth in credit this financial year till now is a flat 0.2% only. Festival season sales have shown an uptick with increase in sales of automobiles and also consumer durables. But it remains to be seen if this trend sustains. The government at the Centre is clearly in an unenviable position with very little fiscal leeway to boost growth by increasing its spending. Some of the reforms announced in the last few months may show some positive results with time. But without more meaningful structural reforms to address long-term problems such as the private sector’s reluctance to invest, it is unlikely that India will move towards the heady days of 8%-plus growth any time soon.

Top News Today

Comments

Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.

We have migrated to a new commenting platform. If you are already a registered user of The Hindu and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.