​Core correction: On output concerns

Weakening output in infrastructure sectors raises concerns about capex growth

Heavy August rains dampened industrial activity, resulting in the first contraction in India’s factory output since October 2022. The signals for a significant September resurgence do not appear very promising, with the late withdrawal of the southwest monsoon also skewing some activity such as power demand. Output from India’s eight core sectors declined 0.8% in September relative to August, and was an insipid 2% higher than last September. These infrastructure sectors constitute about 40% of industrial production, and had contracted for the first time in 42 months in August — the Ministry has revised the de-growth level to 1.6% from 1.8% estimated initially. These sectors have now grown just 4.2% in the first half of 2024-25, almost halving from 8.2% in the first half of last year, and significantly under the 2023-24 growth pace of 7.6%. While year-on-year growth numbers may swing due to base effects, of concern is a consistent decline in the Index of Core Industries (basically the absolute production levels) since May. In September, the index slipped for the fourth successive month — 8% below May’s value. Overall industrial output, economists reckon, may come out of the August trough in September but with a weak growth print at best.

This slowdown in industrial activity is worrisome amid anxiety about weakening urban consumption of durables such as cars as well as daily use items, reflected in weak second quarter results of fast-moving consumer goods firms. Though rural demand is seen to be improving after a healthier monsoon, tremors in urban spends will pull the domestic consumption engine of India’s growth to sub-optimal levels. Government accounts show that capital spending on public infrastructure projects by the Centre has shrunk 15% this year — although capex spiked in July after the 2024 general election dented the first quarter numbers, the pace receded in August and September. This may explain some of the weak output trends for core sectors such as steel that hinge on construction activity. Poor vehicle sales and cheaper imports may have also weighed in to drag steel output growth to a 33-month low of 1.5% in September, with output at its lowest since December 2023. There may be a tentative recovery afoot in private investments, but public infra spends that have spearheaded growth in recent years need to lead the way. The Centre’s ₹11.11 lakh crore capex goal for the year acknowledges this, and it must now ramp up these spends to get closer to, if not entirely meet, that target. This would be critical to keep growth ticking along and push back concerns about India entering a cyclical slowdown.

Published - November 02, 2024 12:24 am IST