Annual core sector growth at decade low as steel drags

India’s annual core sector growth slowed to a decade low of 2.7 per cent in 2015-16, slower than the 4.5 per cent pace in the previous financial year, according to government statistics.

The growth was pulled down by steel and crude oil, both of which saw output contracting by 1.4 per cent and natural gas that dropped 4.2 per cent.

This contrasts with the data showing robust core sector growth in March, when the infrastructure sectors expanded 6.4 per cent, the fastest pace in 16 months.

IIP forecast

Significantly, the eight core industries which include crude oil, fertilisers, steel, cement and electricity account for 38 per cent of India’s industrial output. The index for industrial production has grown at 2.7 per cent in the first 11 months of 2015-16, lower than the 2.8 per cent recorded in the previous year. The industrial output data for March is expected to be released by the Government this week.

“Our forecast for industrial output growth in the month of March is two per cent, so the full year 2015-16 growth could be a shade lower than in 2014-15,”Sonal Varma, Chief Economist, Nomura, told The Hindu .

“Overall, the financial year 2015-16 hasn’t been great, though there are a few green shoots of recovery visible in consumers’ discretionary demand (car sales) and certain infra sectors like coal, electricity and cement due to the government’s capex efforts,” she said.

“The larger question is if those green shoots can broaden into other sectors and revive private investments. Private capex, rural demand and external demand still remain weak,” Ms. Verma said.

The previous lowest growth rate registered by core sectors (under the present data series that uses 2004-05 as a base year) was in 2008-09 when output rose 2.8 per cent amidst the global financial crisis.

Base effect

While oil and gas output has been shrinking for about four years now, it is the decline in steel output in the backdrop of plunging global prices that has hurt the most as it had been growing at an average of 7 per cent in the past four years.

“The March and April infrastructure output numbers may seem a little exaggerated owing to the base effect, as the same months had clocked negative growth last year.

The big disappointment is steel that has been hit by the low global prices and competition from China,” Ms.Varma said.

The steel industry employs six million people directly and generates associated employment for more than 2.5 million.

Wake-up call

Rajiv Kumar, Senior Fellow and Economist at the Centre for Policy Research, said this should serve as a wake-up call for the government to move away from incremental reforms to relieve the distress in the steel sector and push construction and real estate sectors.

“Steel is a mother industry and could be in a comatose position despite import price and anti-dumping curbs to restrict the influx of cheaper Chinese steel. Several plants can go under sooner rather than later so they need a lifeline,” he said.

Realty focus

“Some emergent ‘out of the box’ actions are called for as the real estate industry is also not showing any recovery and would continue to impact cement and steel,” Mr. Kumar said.

“The earlier months of 2015-16 saw low growth, it is critical to see if there’s a turnaround showing up as an uptick from quarter to quarter,” Vinayak Chatterjee, chairman of Feedback Infrastructure Services said.

Overall, the financial year 2015-16 hasn’t been great, though there are a few green shoots of recovery visible

Sonal Varma,Chief Economist, Nomura

Reforms for the real estate sector could help the steel industry Declining steel output, in the backdrop of plunging global prices, has hurt