October , 2023
India’s buoyant core sector supports higher GDP growth prospect
15:31 pm

Tushar K. Mahanti

India’s gross domestic product (GDP) rose by a four-quarter high of 7.8% during April-June quarter of the current fiscal against a comparatively lower growth forecast of many international agencies. The higher growth is largely attributed to the sharp increase in capital expenditure by the central and the state governments, greater consumption demand and higher activities in the services sector.

The higher government spending in infrastructure is reflected in the better performance of the core sector industries. The combined index of eight core industries increased by 8% in July 2023 compared to July 2022. So much so all the eight core sector industries recorded growth for the first time in 14 months this July with core sectors’ output rising 8% after a five-month high of 8.3% in June. In fact, in the last seven months since January the core sector output grew by more than 7% four times.

While July’s performance was buoyed by a 14.9% increase in coal production, natural gas production too grew by 8.9% in July, the fastest pace recorded since February 2022. Steel output also rose in double digits for the ninth successive month, rising 13.5% in July and its cumulative index increased by 15.3% during April-July, 2023 over the corresponding period of 2022. The cumulative output of cement during April-July, 2023 increased by 11.2% over the corresponding period of the previous year reflecting buoyant infrastructure activities.

Role of core sector industries

The core sector industries are the basic industries which have an all round impact on the economic activities of an economy. The core sector in India consists of eight industries including coal, crude oil, natural gas, refinery products, fertilizers, steel, cement, and electricity. These industries have a major impact on general economic activities and also industrial activities. The core sector industries significantly impact the  performance of other industries by supplying inputs and creating demand..

The core sector represents the capital base of the economy. The core sector is also known as an infrastructure facilitator as they produce goods which are used in infrastructure building. The core sector is sub-divided into sectors that can be directed by government policy and sectors that are driven more by demand. For example, the oil sector is a function of demand and government policy as is natural gas. Cement is primarily more a function of demand and the construction activity which although has influence of the government policy. Steel demand is also an outcome of a rise in economic activity but the government has been supportive in the last few years through a more progressive anti-dumping policy. The core sector industry accounts for more than 40% of the IIP and hence is an important determinant of growth.

Core sector performance is considered as the turnaround indicator; economic activity picks up when the core sector number picks up and vice versa. Sectors such as cement, steel and electricity are strong lead indicators for a revival in economic growth. These sectors have a strong multiplier effect on growth and that is normally positive for a revival in growth. And since higher production is associated with higher demand, better core sector numbers signals revival of consumption and is conducive to higher growth.

The government’s renewed focus on infrastructure creation, specifically housing, roads, railways, commercial and domestic real estates and defence procurement in successive budgets has been playing a major role in improving the performance of the steel, cement, power and refractory industries. Budget 2022-23 has increased capital spending by a whopping 33%. In line with the government’s ambitious economic agenda, the Budget focuses on a strong impetus to growth and to strengthen macro-economic stability. Among the many priority areas outlined in the budget, infrastructure development was chosen as to be the main driver of growth and employment.

Core sector performance

New Delhi’s ‘Make in India’ drive seems to have put the country’s core sector industries on a high pedestal. Increasing manufacturing production is directly linked to higher core sector output. Since the core sector industries form the backbone of the industrial base, the government has been nurturing the sector with timely policy interventions, financial facilitation and research and development initiatives.

After independence India’s industrial sector was in very poor condition. The output and productivity were very low. There were only two established industries – cotton and jute. So it became clear that there needed to be an emphasis on industrial development and increasing the variety of industries and the government resorted to undertake industrial policies to meet these objectives.

One of the biggest hurdles in industrial development was the lack of capital. Private industrialists did not have enough capital to build a new industry. And even if they did, the risk involved was too high. This led the government to undertake the setting up and development of core industries including coal, petroleum, aviation and steel. In later years, a growing private sector, however, has slowly replaced government hegemony in many of these industries.

The entry of the private sector helped the core industries to expand capacity and production but above all the emerging competition made it imperative to usher in superior technology. This is reflected in the sharp rise of core sector output over the years.

The production and consumption of steel, a major core industry, are frequently seen as measures of a country's economic development because it is both a raw material and an intermediary product. Therefore, it would not be an exaggeration to argue that the steel sector has always been at the forefront of industrial progress and that it is the foundation of any economy.

India's steel production has reached a historic level of 125 million tonnes per year making it the world's second-largest producer of steel. The production has doubled in the last nine years from 60 million tonnes in 2013-14.

The crude steel production of the state-run Steel Authority of India (Sail) jumped to an all-time high of 18.29 million tonnes in 2022-23, registering a year-on-year growth of over 5%. The private sector giant Tata Steel has achieved the highest ever annual crude steel production of 19.9 million tonnes last year, with a growth of 4% over the previous year. 

The consumption of finished steel stood at 119.17 million tonnes in 2022-23 – up 12.7% from 105.75 million tonnes in the previous year. The installed capacity of steel has increased from 75 million tonnes to 154 million tonnes during the same period.

India's steel consumption is expected to grow by 7.5% during the current fiscal to March 2024, boosted by rising demand from the domestic construction, railways and capital goods sectors according to the industry body, Steel Association of India.

The government’s priority to infrastructure building has steadily increased the demand and production of cement. In five years, between 2017-18 and 2022-23, cement production in India has increased by over 30% or by 87 million tonnes from 287 million tonnes to 374 million tonnes. India is currently the world's second-largest cement producer after China, with an installed capacity of around 540 million tonnes, and is estimated to rise over 600 million tonnes by 2025. India's expansion and growing urbanisation, along with the government's smart city initiative programs and poor-friendly cheap housing projects, is expected to grow the cement market substantially in the coming years. The housing industry utilises 67% of all the cement that is consumed in India, with infrastructure using 13%, commercial buildings using 11% and industrial construction using 9% of the total production.

The cement demand in India is estimated to touch about 420 MT by FY 2027. As India has a high quantity and quality of limestone deposits through-out the country, the cement industry promises huge potential for growth.

Power generation sources range from conventional sources such as coal, lignite, natural gas, oil, hydro and nuclear power to viable non-conventional sources such as wind, solar, and agricultural and domestic waste.

Power sector is undergoing a significant change that has redefined the industry outlook. Sustained economic growth continues to drive electricity demand in India. The government’s focus on attaining ‘Power for all’ has accelerated capacity addition in the country. Although power generation has grown more than 100-fold since independence, growth in demand has been even higher due to accelerating economic activity.

India is the third-largest producer and consumer of electricity globally, with an installed power capacity of 417.66 GW as of May 31, 2023. As much as 41.4% of the generation capacity was in renewable energy sources including hydro electricity. What is significant is that over the years India has succeeded in becoming a power self-sufficient economy. 

However, despite a steady increase in the capacity of renewable energy sources about three-fifths of India’s total power generation is accounted for by fossil fuel. Much of this comes from thermal plants which need coal needing regular and large scale supply of coal.

Through sustained investment and greater thrust on application of modern technologies, India has increased its coal production steadily over the years. The production of coal rose from 706.77 million tonnes in 2019–2020 to 819.36 million tonnes in 2021-22. The rising trend in coal production has accelerated in 2022–2023, and the nation's overall production of coal has impressively increased by more than 7%, reaching 877.50 million tonnes last year. A target of 1.31 billion tonnes has been fixed by the Coal Ministry for FY25 and the same is estimated to go up to 1.5 billion tonnes by FY30. 

Coal India Limited (CIL) and its subsidiaries accounted for 703.20 million tonnes in 2022-23 compared with 622.63 in 2021-22 and 596.22 million tonnes in 2020-21.

If rising output of core industries such as steel, cement, coal and power is driving India’s industrial activities, the steady rise in production of another core industry, fertiliser has become a catalyst for the country’s farm sector’s growth. Fertilisers are used to improve and supplement the demand for nutrients in the topsoil essential for plant growth The sharp rise in India’s agricultural production over the years owes its origin largely to adequate and timely supplies of fertilisers – in five years, from 2017-18 to 2022-23, foodgrains production has increased by a huge 45 million tonnes from 285 million tonnes to over 330 million tonnes.

The Indian fertiliser market size reached Rs 898 billion in 2022 and according to the survey by IMRB Group, the market is expected to reach Rs 1,183 billion by 2028. Traditionally, India depends on imports for a substantial part of its requirements of fertiliser but now it aims to be self-reliant in overall fertiliser production as the government is constructing new manufacturing units to reduce dependency on imports. 

The fertilizer production has increased from an annual 22.23 million tonnes in 1990-91 to 43.66 million tonnes in 2021-22. Fertilizer production increased by 3.3% in July, 2023 over July, 2022. The cumulative output increased by 9.1% during April to July, 2023-24 over the corresponding period of the previous year.

If the core sector industries have done well so far following higher economic growth, the finance ministry’s push to the infrastructure sector to boost growth in recent years is expected to give further fillip to the sector. In fact, the sector has been doing well after the sharp rise in capital expenditure in successive budgets. The index of output of eight core sector industries grew by 7.8% last year.

The growth story of India’s core sector industries is encouraging so far and in line with the GDP growth projection of the government. It is expected that with the full impact of capital expenditure in the coming months, the sector would continue to reach a higher scale. 

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