India’s core sectors have collectively posted a year-on-year contraction of 23% in the month of May 2020. They had recorded a decline of 37% a month back and therefore the performance in May can be seen as a moderate improvement. It is known that the economy was almost under a complete lockdown during the two months under consideration. However, as the unlock process got gradually initiated from the end of May, steady recovery in the core sectors is expected over the next few months.

Among the core sectors, the fertilizer sector has recorded an encouraging growth of 7.5% during the reference month as compared to May 2019. Acuité believes that the start of the kharif sowing season and an expectation of healthy monsoon has given a fillip to the sector. Prior to May, the sector had recorded a modest contraction averaging 3.3% between the months of January and April 2020. The quick pick up in the production of fertilisers also indicates low inventory levels in the system as the kharif related demand has exhausted existing supplies.

It may be noted that India is a large importer of fertilisers with only 70% of the country’s requirements estimated to be domestically produced. India imports fertilisers worth almost $7 Billion annually and $2 billion (27%) comes from China alone. Historically, India’s imports remain high during the months of May-June and again in December-January as demand for fertilizer remains at its peak for the ensuing crop seasons. With the global economic disruption induced by the onset of Covid-19, the import flow over the last few months has been significantly impacted, thereby increasing the demand supply gap in the fertiliser sector further. With the ongoing trade conflict between India and China, the risks of lower imports from China in the current year is a distinct possibility. Therefore, it is reasonable to expect that the capacity utilisation of the indigenous fertiliser sector will remain high in the current year with a possibility of brownfield expansion plans for some of the manufacturers. Further, lower global crude and gas prices will prove to be an advantage for the government as cost of production will remain lower, translating into lower subsidy payouts for the sector in a fiscally difficult year.

As regards the other core sectors, infrastructure and construction related sectors such as Steel and cement continue with their negative trajectory for understandable reasons. Having said that, an improvement is noticeable during the month of May. This reflects the resumption of production in most of the steel and cement units in the country. While the extent of yoy contraction is expected to decline progressively going forward, the output may still remain in the contraction zone unless there is a visible pick up in the real estate sector.

Another core segment that draws our attention is the coal sector. Given the sector’s high correlation with electricity generation, we note that the production contraction of 14.06% is in line with the performance of the larger eco-system of electricity generation at 15.55%. Clearly with over 70% of the country’s power production comprising of thermal (mostly coal fired) sources, the organic material’s relation with electricity will remain significant. Recently, the central government has opened up coal mining for private participants through e-auction. Over the longer term, the entry of private sector players in coal mining will lead to a structural improvement in domestic coal production and lower the existing dependence on coal imports.

Acuité Ratings will continue to track the core sector print since they form the backbone of the economy and will show the first signs of recovery as economic activities come back to normal. We have started to see signs of normalization as the nationwide lockdown is lifted gradually and would expect to see a declining trajectory of yoy output contraction in most of the sectors in the coming months; however, actual expansion is still quite some distance away except for select sectors such as oil, fertilisers and electricity.

Table 1: Core Sector YoY Growth - May 2020:

Source: Ministry of Commerce and Industry, Acuité Research