Output of core industries plummets in April 2020

by Yash Shah

Index of eight core industries (ICI) recorded an abysmal fall to the extent of 38.1 per cent during April 2020. This provides an early snapshot about the output of core industries amidst the lockdown which extended throughout India for most of April.

Along with the data for April, the Office of Economic Advisor (OEA), revised ICI for March 2020. As per quick estimates released on April 30, 2020, ICI for March recorded a 6.5 per cent fall on a year-on-year (y-o-y) basis. As per data released on May 29, 2020, ICI for March was revised downward and recorded a 9 per cent decline in output.

During April 2020, ICI stood at 80.9. This was the first time since 2013 that the index has fallen below 100. A value below 100 indicates contraction in level of production compared to the base period. ICI’s base period refers to the level of production during April 2011.

Core industries include coal, crude oil, natural gas, refinery products, fertilisers, steel, cement and electricity. These industries combined account for approximately two-fifth of overall industrial production, as measured by index of industrial production (IIP). Output declined across all core sectors during April 2020.

In India, steel and cement are majorly used for infrastructure / construction activities. Additionally, steel is also used for production of automobiles and railway wagons. During April, production of steel and cement recorded a sharp drop in production and declined by 84 per cent and 86 per cent, respectively. Due to the lockdown, production of automobiles, railway wagons as well as infrastructure and construction activities came to a standstill in April 2020. As per Society of Indian Automobile Manufacturers (SIAM), there were no domestic sales of automobiles in April 2020. Along with unsold BS-IV inventories, demand for steel from the automobiles sector is expected to remain low. As per reports, JSW Steel, one of India’s major steel producer, operated its plants at 38 per cent capacity in April and is currently operating at 85 per cent capacity in May 2020. According to Indian Steel Association (ISA), demand from infrastructure and construction activities will not pick up until the monsoon is over, since migrant workers who have gone back to their homes are expected to engage in agricultural activities during the upcoming kharif sowing season.

India majorly produces non-coking coal. India also imports non-coking coal to meet its domestic demand. As per data released by Ministry of Coal, India produced 687.6 million tonnes and imported 183.4 million tonnes of non-coking coal during 2018-19. Non-coking coal is majorly used as a source of thermal power for generation of electricity. As per ICI, generation of electricity declined by 22.8 per cent in April 2020. Consequently, production of coal fell by 15.5 per cent in April. As per reports, there was a fall in imports of coal during the month. During May 2020, demand for power gradually picked up as activities are resuming and power consumption has gone back to pre-lockdown levels in certain parts of the country.

In the long run, the Government has decided to allow commercial mining and end its monopoly to boost production of coal in the country. Additionally, the government has announced Rs.0.5 trillion to create coal transportation infrastructure. As per reports, Coal India Limited (CIL) is expected to use the above allocation to switch to mechanised coal transportation through piped conveyor belts and will replace the existing mode of road transportation for coal.

Production of crude oil and petroleum products is heavily dependent on domestic demand for diesel, petrol and aviation turbine fuel (ATF). During April 2020, consumption of ATF declined by 91.3 per cent and consumption of diesel fell by 55.5 per cent. According to Bloomberg, during the first fortnight of May 2020, consumption of ATF was down by 87 per cent and diesel was down by 38 per cent on a y-o-y basis. Mukesh Kumar, Chairman of Hindustan Petroleum Corp., expects sales to get back to 80 per cent of normal sales in a span of two or three months. Thus, production of petroleum products is expected to remain subdued in the near future.

Production of natural gas is linked to generation of electricity as well as production of fertilisers. Production of fertilisers declined both in March as well as April 2020. Fertiliser output declined by 11.9 per cent on a y-o-y basis in March 2020 over a high base of 4.2 per cent recorded in March 2019. Fertiliser output declined by 4.5 per cent on a y-o-y basis in April 2020. Ironically, sales of fertilisers recorded double digit growth in April 2020. As per reports, the spurt in sale of fertilisers occurred due to panic buying owing to anticipation of kharif demand and expectation of rising import prices of fertilisers. Sales which generally happen in June took place in April in the current season. Fertiliser production is thus expected to continue to decline in the short run.

The 9 per cent fall in March and then a 38 per cent fall in April indicates the extent of economic damage that the lockdown can cause to core sectors. These are the relatively essential sectors that are expected to suffer the least fall. The month of May has been under a lockdown quite similar to the one in April. It is therefore quite likely that the decline in May could be similar with a possibility of a lower fall because there have been some relaxations. As of May 31, it is not clear if the lockdown would be lifted from June 1 but in light of recently released guidelines by Ministry of Home Affairs, it is likely that the withdrawal of the lockdown would be gradual. We therefore expect a slow recovery of the ICI from the 38 per cent fall in April. And, a slower recovery for the economy as a whole.