The eight industries that make up the core sector contracted at a steeper pace of 2.6% in November, signalling that the economic recovery from the coronavirus crisis in Asia’s third-largest economy may not yet be on a strong footing.
The core sector, which constitutes 40% of the index of industrial production (IIP), showed signs of recovery in September with only a 0.1% contraction after shrinking 6.9% in the preceding month. However, it contracted at a faster pace in October (-0.9%) and November. To be sure, IIP bounced back to register positive growth in September and October on the back of a recovery in demand for consumer goods and a lower base effect.
Data released by the industry department for November showed that five industries — coal (2.9%), fertilizers (1.6%), steel (-4.4%), cement (-7.1%) and electricity (2.2%) — that had registered strong growth in October faltered in November. Natural gas (-9.3%) contracted at a faster pace.
Only crude oil contracted at a slower pace of 4.9% in November compared to a 6.2% decline in the preceding month. The absence of a lower base, so far available between August to October also contributed to the poor show in November. A higher base effect till February next year means the core sector may continue to underperform other macro indicators.
Madan Sabnavis, chief economist at Care Ratings, said the contraction in growth of steel and cement blunts hopes of a revival in manufacturing and infrastructure.
“Quite clearly, the growth rates of 4% and 3.2% witnessed in October were helped by some element of carry-over demand from the past. The declines of -4.4% and -7.1%, respectively in November are hence quite disappointing. IIP growth can be in the range of 0-1% as consumer goods are likely to remain upbeat for this month given the festival season factor,” he added.
Data separately released by the Controller General of Accounts showed fiscal deficit in the eight months to 30 November stood at 135.1% of the full-year target of Rs 10.8 trillion. November saw a sharp and encouraging ramping up of government spending, with revenue expenditure rising 32% while capital expenditure increased by nearly 250% on a small base.
“A sustenance of this trend will bolster economic activity, and help the Indian economy exit the recession in the coming quarter,” said Aditi Nayar, principal economist at ICRA Ltd.
The pace of contraction in the Indian economy slowed in the September quarter to 7.5% from a historic 23.9% contraction in June quarter due to the shock caused by the pandemic-induced nationwide lockdown.
Since then, many economic agencies have raised their growth forecasts for India, hoping for a quicker-than-anticipated economic recovery. The Reserve Bank of India (RBI) earlier this month projected the Indian economy to contract 7.5% in FY21 –shallower than the 9.5% contraction it had projected just two months ago — on the back of a host of lead indicators that suggest sustained economic recovery. It expects the economy to post 0.1% growth in the December quarter and 0.7% in the March quarter to end FY21 with a 7.5% contraction.
The finance ministry also expects marginal growth in the economy beginning the December quarter.
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