April 2022 core sector up 8.4% as coal output surges

The core sector growth at 8.4% for April 2022 is special in two ways. Firstly, this growth comes on top of a 62.6% growth base in April 2021. One can argue about base adjustment, but it is still amazing growth on a solid base. Secondly, the April core sector growth shows a sharp departure from the trend of the last few months and is the highest level of core sector growth since India achieved core sector growth of 8.7% in October 2021. Remember, this comes amidst rising inflation, supply chain constraints and central bank hawkishness.

A good index of how future data will pan out is the revisions in the core sector numbers. The first revision in core sector growth for March 2022 marked a 60 bps upgrade from 4.3% to 4.9%. However, the final review of January 2022 core sector did not bring about any change. One way to understand the pre-COVID impact is to look at April 2022 core sector growth over April 2020 growth. Over a 2 year period, the core sector for April 2022 is 76.3% above the April 2020 levels. Of course, that was the depths of COVID, but like in the previous month, the infrastructure growth on merit appears to be finally back.

Core sector or infrastructure sector has larger ramifications for IIP and GDP growth. It has a weightage of 40.27% in IIP growth. The 2 year growth was 17.4% in March 2022 and it has shot up to 76.3% in April 2022. Yes, there was the base effect, but the moral of the story is that now there is growth on a standalone basis, even without the base effect advantage. What is more interesting is that infrastructure has grown in April 2022, despite a slew of negative headwinds in the Indian economy as well as the global economy.

Winners and losers among the 8 core sectors

Let us look at the winners first. Coal production was up 28.8% yoy on a major output thrust by Coal India and a boost to captive mining. In April 2022, natural gas output was up 6.4% due to better pricing. Gas prices are up nearly 3-fold yoy. Refining was also up 9.2% yoy on strong gross refining margins (GRMs) and inventory translation gains amidst rising crude prices. Fertilizers saw an 8.7% boost ahead of Kharif 2022 and promise of higher subsidies to farmers. Higher coal output meant power output also increased by 10.7%. With the rise in construction activity, cement recorded 8% output growth, albeit on a smaller base.

There were two sectors that continued to see output pressure, albeit nominal. Crude oil output fell by -0.9% as ageing wells have been hitting ONGC output in a big way. Additionally, steel also saw negative output growth of -0.7% amid shortages of coking coal and erratic domestic demand in the middle of a slowdown in the automobiles sector.

How high frequency momentum panned out in April 2022

Here we look at the break-up of the core sector based on YOY indicators and high-frequency MOM growth. We ignore the FY23 cumulative numbers as they don’t add value with just one month of data available as of now.

Data Source: DPIIT

The big data point to watch out is the fourth column of the MOM growth, which is the high frequency growth. The YOY figure can be influenced by the base effect, but not the high frequency growth on MOM basis. On a MOM basis, there is a sharp fall in core sector growth as the momentum gained in March appears to have been lost in April. Let us look at some of the key drivers in the above table.

1. The first data column is the weightage column which tells you how much impact a change in a particular component can have on the overall core sector growth. Refinery products, electricity and steel have a high combined weight of over 65%.

2. The second column is the break-up of yoy core sector growth of 8.4%. Here, 6 out of 8 core sectors are in the positive. While crude has remained in the negative for some time, steel also dipped marginally on supply bottlenecks. Big positive stories were coal power, fertilizers, refining and natural gas

3. The third column captures high-frequency MOM growth. This is the big story for April 2022 with 7 out of 8 core sectors recording negative growth. That is why this column is important. The YOY figure looks stupendous due to the base effect but a look at the MOM figure tells you that April core sector has seen a lot of pressure compared to March 2022. It shows that the negative impact of the war and the supply chain constraints on the infrastructure sector. Clearly, normalcy is going to take longer.

How has FY23 started off for core sector

Here is a time-series pack of annual core sector growth over last 10 years.

Data Source: DPIIT

For now, we just have one month data for FY23 and hence greater details will be awaited. The last full year data for FY22 looks impressive at +10.4%, surely the best in the last decade. However, this comes on top of a negative growth of -6.4% in FY21. If you compare FY22 over FY20, core sector growth over pre-COVID period stands at 3.33%. That is almost at par with the average core sector growth in 8 years prior to COVID.

The big challenge going ahead would be handling the lag effect of the supply chain bottlenecks, high inflation and an ultra-hawkish monetary policy. Most of the infrastructure sectors in the core numbers have strong externalities. The next few months could provide major clues to the future growth trajectory of the Indian economy.