Impact: (Industrial production, cement, steel, infrastructure, GDP Growth)

Brief: India’s core sector production has decelerated to 1.8% in January, 2019. The sector is on a downward roll over the past three months. Poor performance of the sector is primarily contributed by the energy segment. Slower growth in energy segment hints manufacturing activities are weakening. Nevertheless, steel and cement, categories which are associated with infrastructure, have been expanding at a healthy rate.

India’s core sector production has decelerated to 1.8% in January, 2019. The sector is on downward roll over the past three months. Poor performance of the sector is primarily contributed by the energy segment. Resultantly, crude oil production and petroleum refinery output has contracted by (-) 4.3% and (-) 2.6%, respectively. Electricity production has contracted by (-) 0.4% during the reference period – a disappointment after recording robust expansion for much of the financial year. The sector deserves special mention here as it posted negative growth, first time in six years.

Slower growth in energy segment hints manufacturing activities are waning. This is a cause of concern as it would spread to other supply side sectors as well. On the other hand, other core sectors such as steel and cement that are associated with infrastructure have been expanding at a healthy rate.

The core sector data for January, 2019 indicates FY19 would post another weak number (GVA) in Q4. Recently, RBI MPC has trimmed policy rate by 25 bps. The committee was concerned about the weak consumer demand in the domestic market – a fact that is evident from the lower than usual inflation print. However, improvement in global financial conditions and restored stability in crude oil prices may be termed stabilizing. Additionally, RBI’s initiatives to boost consumption (through effective liquidity management and Rate rationalization) are expected to positively influence industrial activities. State government financial support (along with central government) for marginal farmers under direct income support programs is a key mention here as it boosts rural demand and provides a fillip to the supply side.

It now remains to be seen how Government expenditure comes back online considering the fiscal consolidation mandates. The below average inflation print is therefore the central thesis. While its declining trend may help in credit offtake, Government fiscal space may be adversely impacted. How the industry (manufacturing) reacts to the situation from here on out, cannot be ascertained at the moment.

IIP growth in core sector: