On October 29, the Office of Economic Adviser within the Department for Promotion of Industry and Internal Trade released the Index of Eight Core Industries (ICI) for September 2020.
Accordingly, when compared to September 2019, the ICI contracted by 0.8 per cent in September 2020. In terms of cumulative growth in the first half of the current financial year — that is, between April 2020 to September 2020 — this index contracted by 14.9 per cent (see CHART 1).
What is the Index of Core Industries and what does it signify?
As the title suggests, this is an index of the eight most fundamental industrial sectors of the Indian economy and it maps the volume of production in these industries.
TABLE 1.1 gives the details of these eight sectors — namely Coal, Natural Gas, Crude Oil, Refinery Products (such as Petrol and Diesel), Fertilisers, Steel, Cement and Electricity.
The index gives different weights to each of these sectors to arrive at a final figure. TABLE 1.2 provides the growth rates for each sector along with the weights assigned to each sector. 📣 Express Explained is now on Telegram
As can be seen from this Table, Refinery Products have the largest weight while Cement has the lowest weight. Steel and Electricity are the other heavyweights.
Since these eight industries are the essential “basic” and/or “intermediate” ingredient in the functioning of the broader economy, mapping their health provides a fundamental understanding of the state of the economy.
In other words, if these eight industries are not growing fast enough, the rest of the economy is unlikely to either.
How to read the latest data?
There are two ways to read the performance in September 2020.
One is to see it relative to the performance in September 2019. As can be seen from CHART 1, the ICI had contracted by 5.1 per cent last September (that is, over September 2018). In that context, for the ICI to contract by 0.8 per cent in this September shows continued weakness in the economy.
In the same light of reasoning, as TABLE 1.2 shows, the April to September growth is a minus 14.9 per cent over the same period last year. It can also be seen that some of the weightiest sectors have contracted the most. Further, this year’s contraction is happening at the back of rather meagre growth last year (1.3 per cent) and this points to a sustained period of industrial growth in the Indian economy.
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The other way to look at this data is to focus on the trend of ICI growth over the past 6 months — that is, since the start of the Covid-19 pandemic and associated lockdowns.
In that context, one can see that while the ICI in September contracted but the rate of contraction was less than 1 per cent — which s far less than the rate of contraction in any of the past 6 months. In other words, the September data shows promise of an economy that may be extricating itself out of the Covid-induced downturn.
In this regard, it helps to look at TABLE 1.3 which provides the monthly growth rates. As the data shows, in September three crucial sectors — Coal, Steel and Electricity — actually grew over the same month last year. Further, Cement contracted but the rate of contraction was much smaller. The contraction in refinery products, too, is not as sharp.
Does that mean the economy is out of the woods?
While this data is in line with a flurry of other variables such as exports growth and car sales numbers that improved in September yet experts across the board argue that it is best to wait for a few more months of data as conclusive proof that the economy is on the bend.
A crucial factor in this regard would be the next wave of Covid-19 infections. If there is a surge in the winter months — as is being witnessed in most Europe and the US — then India’s recovery will be dented yet again.