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India's core sector output experienced a contraction of 1.8% year-on-year in August 2024, marking the first decline in 42 months. This downturn is primarily attributed to the statistical effect of a high base, as the sector had witnessed substantial growth in the corresponding period last year. The core sector, encompassing eight key industries, had registered a 13.4% growth in August 2023 and a 6.1% growth in July 2024.
The decline in output defied economists' predictions of a 2-3% growth during the month. With the exception of fertilizers and steel, six other sectors—coal, crude oil, natural gas, refinery products, cement, and electricity—saw contractions in their output during August. Aditi Nayar, chief economist at Icra, attributed this to excess rainfall that disrupted mining activities, leading to decreased production of coal, crude oil, and natural gas. This, in turn, resulted in a contraction in electricity generation.
Furthermore, the high base effect amplified the decline in these sectors. The deficient rainfall experienced in August 2023 had positively impacted the output of these sectors in that month, creating a challenging comparison for August 2024. The adverse base and excess rainfall are also believed to have negatively affected cement and steel production. Cement output registered a year-on-year contraction, while steel production witnessed its slowest growth in 26 months. This downturn suggests a weakening in construction activity during the first two months of the current financial year.
India Ratings and Research (Ind-Ra) attributed the positive growth in steel production to inventory buildup by the automotive sector in anticipation of the festive season. The core sector's significant weight (40.3%) in the Index of Industrial Production (IIP) suggests that the contraction in infrastructure sector output will likely impact industrial output as well. Analysts anticipate a slight contraction of around 1% in the IIP for August 2024.
Suman Chowdhury, chief economist at Acuite Ratings & Research, expressed optimism about a significant rebound in core sector output from October onwards, driven by increased government spending on infrastructure projects. However, he anticipates a moderation in sector growth to 4.5%-5.0% in FY25 compared to the robust 7.6% growth recorded in FY24.