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Six Core Infrastructure Sector Gives Mixed Signals

The index of the six core industries, which include crude oil, petroleum refining, coal, electricity, cement and finished steel, has a combined weight of 26.7% in the index of industrial production (IIP).

The six infrastructure industries grew 3.9% in July, marginally higher than in June, but contraction in steel and cement has raised doubts about the overall industrial output growth, which slowed to a 13-month-low in June. This is because the performances of these sectors are considered advance indicators of overall industrial activity. While cement and steel show investment demand, the energy sectors reflect pace of overall economic activity.

Core sector growth during July 2010 was boosted primarily by crude oil and petroleum refinery production, while steel and cement were major drags. Crude oil and petroleum refinery output recorded a double-digit growth as output by private and JVs, mainly Reliance Industries (RIL), surged.

Taking advantage of the rising refinery margins, and in order to meet local demand, refineries in India have ramped up production in FY11. The increase in output came in spite of public sector refineries shutting down some of their plants for annual maintenance and repairs.

However, RIL‘s Jamnagar refinery had shut down for maintenance last July, resulting in a stupendous 50% growth in output in July 2010 when compared to July 2009 output. Refineries operated at 105.6% capacity in July 2010, up from 96.8% in the corresponding year-ago month. This data excludes figures of RIL‘s sec-ond refinery at Jamnagar.

The high base of last year and good monsoon rain in mining areas resulted in a deceleration in coal production. Recording a marginal 0.9% growth during April-July 2010, India fell short of its production target by 5%.

Poor coal production also resulted in moderate growth in power generation. Lower coal imports in July led to 24 coal-fired power stations facing coal stocks of less than seven days compared to a required average stock of 25-30 days. Poor coal supply, together with slow capacity addition, resulted in slow growth (5.2%) in electricity generation during April-July 2010.

While cement is a seasonal commodity, a dip in its production is not very worrisome. However, decline in cement as well as steel output is raising concerns for analysts because demand for both these commodities also reflect investment demand.

However, it must be noted that the global steel industry is lowering production as it attempts to bridge the demand-supply gap. An increase in inventories by the end of the June quarter put pressure on prices, thereby leading producers to cut production in July. Thus, a dip in steel production does not necessarily mean contraction in domestic demand.

Slow production growth in the six core sectors was also accompanied by a deceleration in growth of exports from India. Export growth moderated to 13.2% in July from over 30% in the past few months. This has heightened fears of slower growth in July IIP, figures for which will be released on September 10, 2010.

Sector-wise Growth Rate (%) in Core Sector Production
Sector                  Weight (%) Jul-09 Jul-10 Apr-Jul   2009-10 Apr-Jul  2010-11
Crude Oil 4.17 -0.4 15.8 -1.0 8.4
Petroleum Refinery Products 2.00 -14.4 13.7 -6.9 7.3
Coal                   3.22 10.5 4.5 12.4 0.9
Electricity             10.17 3.8 3.8 5.3 5.2
Cement                   1.99 13.8 -0.2 12.5 5.2
Finished steel (carbon)          5.13 4.0 -0.9 2.3 2.5
Overall                      26.68 3.2 3.9 4.0 4.5
Source: PIB

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