Core sector woes to continue as shortage of semiconductors, coal weighing more

The core sector growth slid a seven-month low to 4.4 per cent in September from a gr. Unfortunately, the trend is likely to continue when we get the similar figures for the month of October too.

The story does not end here. Lower core sector growth and the impact of semiconductor shortages on auto output are expected to dampen the September IIP growth to 3-5 per cent, despite the pre-festive season inventory build-up suggested by the GST e-Way bill data. The sequential momentum expectedly recorded a broad-based slowdown with a MoM dip of 5 per cent in September, reflecting the impact of heavy rains on certain core sectors.

Still, there is a light at the end of the tunnel. What with the fact that core output in September exceeded the pre-Covid level of September 2019 by 5 per cent. Of course, it was driven by factors like coal, natural gas, steel, cement and power.

If there was a crash in the YoY growth of electricity generation to 0.3 per cent in September from 16 per cent in August. Then it was due to the base effect, demand slowdown from household/agri segments given the heavy rainfall in September, as well as the impact of coal shortages on thermal power generation. With rainfall exceeding the long period average by 35 per cent in September, the YoY growth in coal output eased to 8.0 per cent in September from 20.5 per cent in August.

While the sequential momentum would improve, Icra expects the YoY core sector growth to remain subdued at 4-5 per cent in October. However, there are a few tailwinds which are enough to propel the country's economy.

With a near-doubling of revenues outpacing the 10 per cent rise in expenditure, the GoI's fiscal deficit compressed to four-year low at Rs 5.3 trillion in the first half of the current fiscal from Rs 9.1 trillion a year ago and remained lower than the Rs 6.5 trillion in the year-ago's pre-Covid period.

Notwithstanding the benign fiscal print, high crude oil prices and the looming taper by the US Fed may push up the 10-year G-sec yield to as much as 6.45 per cent in this quarter. Again, the GoI's gross tax revenues recorded a substantial 50 per cent growth in September, benefiting from robust advance taxes amid a formalisation of the economy. With the corporation tax, CGST, customs and excise duty collections exceeding 50 per cent of the fiscal's budget expectation (BE) in H1, and the likelihood that rising vaccinations will boost confidence and spending in the second half.

Encouragingly, the GoI's total expenditure surged by 51 per cent in the month of September, and the healthy 21.2 per cent expansion in Q2 is expected to support the pace of GDP growth in that quarter. After the ramping-up of spending seen in the month of September, analysts anticipate that expenditure will remain robust in the second half of this year.