Core Sector Grows by 6.3% in May; Higher Output in Power, Coal, Steel

India IPO

Updated Jun 28, 2024

Combined Index of Eight Core Industries increases by 6.3% in May img

The slight moderation in core sector growth is likely to be a drag on industrial output, according to experts.

Core Sector Grows by 6.3% in May; Higher Output in Power, Coal, Steel

India's core sector growth eased slightly to 6.3% in May from a revised 6.7% in the previous month, due to a contraction in the cement industry despite higher output in coal and electricity, according to government data released on June 28.

"Factors like the heatwave and phased Parliamentary Elections may have curtailed activity in some sectors," said Aditi Nayar, chief economist at Icra.

The Index of Eight Core Sector Industries, which measures output in cement, coal, crude oil, electricity, fertilizers, natural gas, refinery products, and steel, accounts for 40% of the Index of Industrial Production (IIP).

The slight moderation in core sector growth could impact overall industrial expansion, experts suggest.

"We expect IIP growth to be 4-5% in May 2024," Nayar added.

Sequentially, the index representing infrastructure output grew by 3.7%.

Mixed Performance

Three of the eight industries contracted in May, up from two in the previous month, while growth eased for three others. Electricity output surged by 12.8% compared to 10.2% in April, and coal sector output expanded by 10.2% from 7.5%.

Experts believe the heatwave increased demand for electricity and coal. "The power sector's 12.8% growth was driven by higher demand due to the heatwave, which also boosted coal production," said Madan Sabnavis, chief economist at Bank of Baroda.

Cement and fertilizers saw deeper contractions in May, at -0.8% and -1.7%, respectively. This marked the fifth consecutive month of contraction for fertilizers and the second for cement. The crude oil sector also contracted after four months of positive growth.

"Coal, crude oil, and refinery products output were just 7.9%, 3.0%, and 10.0% higher than pre-COVID levels, indicating that a sustained broad-based recovery is still some distance away," said Ind-Ra economists Paras Jasrai and Sunil K Sinha.

This data precedes the government's upcoming budget presentation. Experts anticipate continued government emphasis on capital expenditure to boost infrastructure growth.

"States are expected to frontload their capex, providing support to construction and infrastructure sectors. Ind-Ra expects core sector growth to be around 6% in June 2024," noted the economists, referencing the tax devolution to states in June 2024.

The industry is advocating for a capex increase to 25% of the previous year's spend of Rs 9.5 lakh crore, compared to 17% in the interim budget. India's growth prospects are improving, as the Reserve Bank of India recently revised the FY25 growth forecast upwards to 7.2% from 7%.