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Why Core Sectors of India are Slowing Down?

IndianMoney.com Research Team | Posted On Monday, November 25,2019, 05:09 PM

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Why Core Sectors of India are Slowing Down?

 

 

The core sectors are the main industry in India. It is the backbone of the country. The 8 core industries are coal, steel, electricity, crude oil, natural gas, fertilizers, cement, and refinery products. The 8 core sectors have around 40% of weightage in the IIP. (Index of Industrial Production).

What is IIP?

The Index of Industrial Production gives the performance of different sectors of the economy. It is published each month by the CSO (Central Statistical Organization). IIP shows the change in volume of production in Indian Industries. A basket of industrial products is chosen which ranges from energy to mining and an index is created. Weights are assigned to each sector and production is tracked each month. The index is then compared to the value in the previous month to gauge India’s economic health.

IIP in a Nut Shell

Weightage (%)

Industrial Output

100

Use-based classification

 

Primary Goods

34.1

Capital Goods

8.2

Intermediate Goods

17.2

Infrastructure

12.3

Consumer Durables

12.8

Consumer Nondurables

15.3

Sectoral classification

 

Mining

14.4

Electricity

8

Manufacturing

77.6

Let’s take a look at the IIP index in India in the last few months. At -1.1% in August 2019, IIP was the lowest since November 2012. Factory output contracted -5.2% in September from 4.3% in the year-ago period. This shows a slowing economy and deteriorating consumer sentiment.

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Why Core Sectors of India is Slowing Down?

Let’s take a look at why the core sectors are slowing down.

Coal: Coal has been a terrible performer because of an extended monsoon. There has been a surge in renewable energy supply compounded by labor issues. Coal output contracted by 20.5% in September. This has impacted electricity generation which also declined by 3.7% in September.

Electricity: Energy consumption mainly electricity, refinery products, and crude oil, has been falling in recent times. Energy consumption shows the overall demand in the economy. IOC reported an 83% fall in second-quarter profit. This is after a slump in inventory losses and refinery margins. Electricity demand depends on factory output. If factory output is down, electricity and crude oil consumption fall.

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Crude Oil: Consumption of petroleum products in the month of September fell to 16.01 million tonnes which were the lowest since July 2017. Diesel which is a heavily used fuel in India saw a fall in demand along with Naphtha. Bitumen sales too fell down. Fortunately, cooking gas (LPG) and petrol saw a rise in demand. 

LPG: LPG saw an increase in consumption on the Government’s push for clean fuel in Indian household kitchens, especially in rural areas. LPG is a safeguard for firewood which can check pollution and improve women’s health. LPG is fast replacing kerosene as the fuel of choice in Indian rural households.

Steel: Both cement and steel were impacted by prolonged monsoon. Steel output contracted 0.3% and cement fell 2.1%. Coal, Crude Oil, and petroleum are linked to the demand side for automobiles and manufacturing. There has been a fall in demand for automobiles in recent times. India’s automobile sector saw thousands of jobs being cut with an unprecedented slowdown in sales. Steel production is facing problems due to the slowdown in infrastructure. Steel prices have fallen while raw material prices continue to rise.

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Why the Core Sector is Falling Down?                            

Demand slowdown has taken a toll on the 8 core sectors. The Government must address this serious concern before it gets worse. IIP for October would most probably be on the negative side, despite the festive season. Mild recovery on the output side is expected in November.

Yes, the Government is doing its bit by cutting corporate tax and even offering sector-specific benefits. However, it’s struggling to achieve key targets like tax collection and fiscal deficit. The Government must consider a cut in personal income tax and also measures are urgently needed to boost the real estate sector in India.

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