05

India’s gross domestic product growth has slumped to a seven-quarter low of 5.4% in July to September 2024 quarter – much lower than even the most pessimistic projections. GDP grew by 8.1% in the second quarter a year ago. That GDP growth was slowing down was evident when it grew by just 6.7% in the first quarter against 8.2% in the same quarter of last year. Gross value added (GVA) growth slowed to 5.8% during July-September 2024-25 quarter from 6.8% in the first quarter. GVA grew by 7.7% in the second quarter of last fiscal.

The poor performance in the first two quarters has caused the finance ministry to downsize the projected GDP growth to 6.4% for 2024-25 against 8.2% achieved last year. The International Monetary Fund (IMF) has lowered India’s growth forecast to 6.5% for 2024-25 as against 7% projected earlier. The World Bank too has lowered its growth projection to 6.5% in 2024-25. The Bank has, however, kept its growth forecast for India unchanged at 6.7% for FY26, maintaining that the country will remain the fastest-growing major economy for the next two years.

The decline in GDP growth is largely attributed to the fall in capital expenditure by the central and the state governments, lower consumption demand and poorer activities in the services sector. Investment growth declined to 5.4% in Q2 from 7.5% recorded in the previous quarter. Private final consumption expenditure and gross fixed capital formation together account for a fall of 1.5% points which probably explains the fall in the GDP growth from 6.7% in Q1 FY25 to 5.4% in Q2 FY2, analysts suggest. The central government’s capital expenditure in the first half of the current financial year was 15.4% lower when compared with the corresponding period of last year.

While this could potentially reflect the lagged impact of subdued capex disbursal by the general government, it is also likely that private investments remained lackluster during the quarter. This had a huge impact on the infrastructure sector. The poor performance of the eight key infrastructure sectors, the core sector, was one of the prime reasons for the deceleration in GDP growth in July-September, 2024-25 quarter and is evident from their actual performance. The core sector accounts for over 40% of the index of industrial production and its performance has a significant impact on the overall performance of the industrial activity. After growing at record rates of 10.3% in 2021-22, 7.8% in 2022-23 and 7.6% in 2023-24 the core sector seems to have suddenly faced a roadblock in 2024-25. During the first eight months of the current year, between April and November, the overall index of the eight core industries’ output grew by 4.2% over the corresponding period of the previous year; less than half that of 8.7% growth during the first eight months of 2023-24.

What is disturbing is that the output growth of all the eight core sector industries witnessed a decline during the first eight months of 2024-25 compared with that of 2023-24. The steel production witnessed the sharpest Y-o-Y decline – down from 14.5% in April-November 2023-24 to 5.9% in April-November 2024-25. Growth of cement production fell from 10.2% to 3.1% during the same period.

Core sector, the engine of growth

The core sector industries are the basic industries which have an all round impact on the economic activities of an economy. The sector’s performance is considered as the key indicator of a country’s overall industrial and economic performance, serving as a barometer for measuring the health of the economy and predicting future economic trends. For example, steel is a critical material for construction, automobiles, and machinery. Electricity is essential for powering factories, homes, and businesses and cement is an essential ingredient for construction activities.

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 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 performance of the sector thus, 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 of economic growth. These sectors have a strong multiplier effect on the overall industrial and infrastructure 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.

And if Sitharaman has given special priorities to farm growth, job creation or human resource development, she has kept her faith on infrastructure building in successive budgets to drive growth. Investment made over the years in building and improving infrastructure has had a strong multiplier effect on the economy. “We will endeavour to maintain strong fiscal support for infrastructure over the next 5 years, in conjunction with imperatives of other priorities and fiscal consolidation”, FM has claimed in 2024-25 Budget. She has provided `11.11 lakh crore for capital expenditure in the budget -- about 3.4% of GDP, a little more than that of the previous year’s figure of 3.2%.

Core sector performance over the years

If the core sector industries have not done well in the current year so far and affected the country’s GDP growth, its better performance in the preceding years alternatively was a big factor for higher economic growth. 

The linkage between GDP growth and core sector performance is obvious as the activities of the manufacturing industry, the infrastructure sector and even the service activities are directly linked to core sector performance. 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.

The entry of the private sector has 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 144 million tonnes in 2023-24. It is the world's second-largest producer of steel accounting for about 8% of world production. In just five years, between 2028-29 and 2023-24 India’s crude steel production has grown over 30% from 110.92 million tonnes to 144.30 million tonnes. The growth of steel production, however, has been subdued in the current year – it grew by 3.5% in the first half against the same period of last year.

The growth in the Indian steel sector has been driven by the domestic availability of raw materials including iron ore and cost-effective labour. The industry is modern, with state-of-the-art steel mills. It has always strived for continuous modernisation of older plants and up-gradation to higher energy efficiency levels.

According to a Deloitte report the demand for steel in India is projected to grow significantly over the next decade, with annual growth rates expected to range from 5% to 7.3%.  The government’s priority to infrastructure building has steadily increased the demand and production of cement. In five years, between 2018-19 and 2023-24, cement production in India has increased by over 30% or by 100 million tonnes.

India cement market size was estimated at around 3.96 billion tonnes in 2024 and is projected to reach 5.1 billion tonnes by 2030. India is currently the world's second-largest cement producer after China, with an installed capacity of around 670 million tonnes per annum and a cement production output of around 427 million tonnes in 2023-24. 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 expanding infrastructure development has resulted in the heightened demand for cement in the country. For example, it is estimated that the bullet train corridor between Gujarat and Mumbai which involves numerous tunnels and stations requires around 20,000 cubic meters of cement daily.

The government schemes like PM Awas Yojana for rural and urban India are greatly boosting housing development in the country causing a sharp increase in cement demand. The housing industry utilises 67% of all the cement that is consumed in India. The PM Awas Yojana for rural India has 34.9 million registered beneficiaries as of November 2024 with 26.6 million houses already being completed. In urban sector 8.7 million houses, out of 11.8 million sanctioned, have already been completed. The surge in the cement demand in the country is leading the industry to raise its installed capacity. These developments will boost the market growth in the coming days.

The power sector, at the other end, with steady increase in generation has been helping the growth of other industries. The 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

With accelerated growth in generation the sector has diversified its sources over the years too. From conventional sources such as coal, lignite, natural gas, oil, hydro and nuclear the sector has moved to viable non-conventional sources such as wind, solar and agricultural and domestic waste.

India is the third-largest producer and consumer of electricity globally, with an installed power capacity of 456.76 GW as of November30, 2024. As much as 45% of the generation capacity was in renewable energy sources including hydro electricity. More than three-fourths of the renewable capacity is accounted for by solar, wind and waste sources. What is significant is that over the years India has succeeded in becoming a power self-sufficient economy.     

Energy deficit – total demand against total supply of power – was estimated at 0.1% during April-November 2024. And this was the story for the last nine years.

But although India has increased capacity and generation of renewable energy sources, the power sector is still dependent heavily on fossil fuel. Much of this comes from thermal plants which need coal needing regular and large scale supply of coal.

Keeping in mind the importance of a steady growth in coal supply, the government, through sustained investment and greater thrust on application of modern technologies, has increased coal production steadily over the years. The production of coal rose from 728.28 million tonnes in 2018-19 to 997.83 million tonnes in 2023-24.  

The trend in production has continued through the current year. The cumulative coal production up to Dec’24 witnessed substantial growth, reaching 726.29 million tonnes compared with 684.45 million tonnes produced during the same period in the previous year.

In the current year so far, the core sector industries, however, have performed poorly affecting the GDP growth. But the finance ministry’s push to the infrastructure sector to boost growth is expected to help the sector to turn around soon. In fact, the sector after witnessing a decline of 1.5% in overall output index last August has improved its performance significantly to record a 4.3% growth in November. One hopes that with the full impact of capital expenditure in the coming months, the sector would repeat its past performance – the sector grew by more than 7.5% in each of the last three years.