Core performance

Core infrastructure data, as represented by six core industries in December, suggests that industrial production, which has been languishing in recent months, may soon perk up. Making up a little over a quarter of the Index of Industrial Production (IIP), the six core industries grew at 6.6 per cent over a year ago.

The growth holds significance as this is the fastest core sector growth rate in three years. With this, the average growth between April and December 2010 rose to 5.3 per cent as against 4.3 per cent and 3.2 per cent during the preceding two fiscal years.

The year-to-date average, though, is still lower than the 6.6 per cent growth witnessed in the pre-slowdown period of April-December 2007. Clearly, either low capacity utilisation or delays in adding capacity itself appears to be hampering production growth now.

Encouraging growth

However, some of the core sectors have shown encouraging signs of growth. Crude oil, finished steel and petroleum refining contributed to the index growth the most. Crude oil production has been growing at a double-digit rate since July 2010 as Cairn India ramped up its crude oil production.

Cement production, on the other hand, continued to decline. There was a 2.2 per cent decline in cement production as compared to the average growth rate of 4.4 per cent during April-December 2010 and 11 per cent during the same period the preceding year. For demand-supply scenario of cement, please read the sector view opinion on cement.

Power generation

Electricity generation, which has the highest weight in the IIP index (10.17 per cent), grew at a modest 4.3 per cent during December 2010, despite 8.3 per cent higher capacity added during the calendar year 2010. This may be partly due to lower short-term power off-take during this period.

What is encouraging is that the electricity generation grew at 9.3 per cent in January 2011 (Source CEA), giving guidance for a stronger core sector growth for January, as electricity accounts for a significant 38 per cent weight in the core sector index.

The major feedstock to power sector, coal, saw improvement in its production, but the growth continued to be a sedate 4 per cent year-on-year.

Given that there have been concerns over low production, the Ministry of Coal increased the import target from 82.33 million tonne to 142 million tonne. Clearly, this suggests the government does not expect any significant ramp-up on this front in the next few months. Hence, this core sector may continue to remain sluggish.