What are the core sector numbers showing for growth?

Core sector is the collection of 8 very important infrastructure sectors which normally sets the tone for the Indian economy. Core sector is important as it has a 40.27% weightage in the IIP and hence acts as an important lead indicator for future growth potential.

To begin with, the core sector numbers for September 2020 were extremely encouraging. Core sector is normally announced with a lag of one month, i.e. on the last day of the next month and it normally precedes the IIP by around 10-12 days every time.

One can argue that core sector continues to contract for the seventh month in succession but at -0.8% the contraction is the least we have seen in almost 13 months, of which the core sector has been negative in nine out of the thirteen months.

The core sector has been in the negative for 9 out of the last 13 months and the cumulative core sector growth for the first six months of the fiscal Apr-Sep stood at -14.5%. This is clearly a vast improvement from the last few months.

The good news from -0.8% contraction is that the core infrastructure production is finally getting back to pre-COVID levels. For the first time in the last 6 months, 3 out of 8 core sectors; coal, steel and electricity registered positive growth.

For core sector to really pick up from here, oil prices need to pick up. The biggest challenge is weak crude prices because three of the eight core sector segments consisting of oil extraction, natural gas and oil refining depend on robust crude oil prices.

Now, these three oil dependent segments jointly account for 45% of the core sector growth; and they depend on robust crude oil prices. So unless oil prices really pick up to more sustainable levels, the core sector may struggle to really reach out further.