August core sector lower at 3.3% as high base effect takes its toll

3 Oct 2022 , 05:11 AM

However, this 3.3% growth is on a fairly high base of 12.2% in August 2021, so it is not all that bad in relative terms. The core sector had tapered sharply after August 2021, so going ahead, the core sector number should get the benefit of a lower base. That is likely to magnify the core sector number in the coming months, assuming that the global headwinds and the economic slowdown do not take a very big toll on overall growth.

A good barometer of how future data will pan out is revisions to previous core sector numbers. The first revision in core sector growth for July 2022 has retained the core sector growth for July at 4.5%. However, the final revision for May 2022 resulted in core sector growth being upped by 120 bps from 18.1% to 19.3%. One thing is clear that the miasma of the COVID overhang is well and truly over and any growth from here would purely be on merit. Core sector growth is already decisively above the pre-COVID levels.

Data Source: DPIIT (Department for Promotion of Industry and Internal Trade)

The core sector or infrastructure sector number, normally, has larger ramifications for the index of industrial production (IIP) and the GDP growth. Core sector has a weight of 40.27% in the IIP basket. Apart from the IIP impact, the infrastructure sector also has strong externalities with wider impact. For example, the growth in cement and steel, have a multiplier effect on overall GDP growth. In a sense, the core sector on a cumulative basis for FY23 has remained robust at 9.8% despite global and domestic headwinds.

Here is how the 8 core sectors performed in August 2022

In August 2022, 6 out of the 8 core sectors were in the green with crude oil extraction and natural gas once again showing negative growth on a yoy basis. Let us begin with the segments that triggered the core sector growth. Fertilizers were the start of the month, growing at 11.9% followed by coal production growing at 7.6% yoy amidst heavy power demand. Refinery products followed with 7% growth despite the GRMs tapering from the peak. Refinery products also have a high weight and so the impact is magnified. Steel grew 2.2% on a yoy basis while cement grew at just 1.8%. Electricity growth was tepid at 0.9% in August 2022. Fertilizers continued to gain from favourable government subsidy boost.

Crude oil extraction and natural gas saw lower output in August due to pricing issues in gas (it has just been revised towards the end of September) and ageing wells for crude oil production. In both cases, prices have been subdued due to demand concerns, although the European gas crisis is still on. The positive 3.3% core sector growth can be attributed to strong growth in refinery products, which has a 28.04% weight and coal which has a weightage of 10.33%. It could have been better, had it not been for the tepid performance of electricity output, which has a weightage of 19.85% in the core sector basket.

High frequency core sector disappointed for the 3rd month in succession

Here we look at the break-up of the core sector based on YOY indicators and high-frequency growth. We also look at the FY23 cumulative numbers. As of now we have 5 months of data, which can be a fair reflection of the longer term trend.

Core Sector Component	Weight	Aug-22 (YOY) %	Aug-22 (MOM) %	FY23 Cumulative (%) *
Coal	10.3335	+7.6%	-3.9%	+22.7%
Crude Oil	8.9833	-3.3%	-0.8%	-1.1%
Natural Gas	6.8768	-0.9%	+0.6%	+2.6%
Refinery Products	28.0376	+7.0%	-4.8%	+10.8%
Fertilizers	2.6276	+11.9%	+2.6%	+11.4%
Steel	17.9166	+2.2%	+0.1%	+5.8%
Cement	5.3720	+1.8%	-2.3%	+10.6%
Electricity	19.8530	+0.9%	+0.8%	+10.5%
Core Sector Growth	100.0000	+3.3%	-1.5%	+9.8%

Data Source: DPIIT (* FY23 is Apr-Aug)

The critical data point to watch out is the fourth column of MOM growth (shaded column), which represents high frequency growth for August over July. The YOY figure is influenced by the base effect, but the high frequency MOM growth captures short term headwinds and tailwinds a lot better. On MOM basis, core sector growth was negative for the third month in a row with 4 out of 8 sectors showing positive momentum and 4 sectors showing negative momentum in the month of August 2022.

a)      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, Coal and steel have a high combined weight of over 75%.

b)      The second column is  the break-up of yoy core sector growth of 3.3% for August 2022. Here, 6 out of the 8 core sectors are in the positive, with crude oil and natural gas contracting. Positive thrust came from refining and coal but weak growth in electricity and steel put pressure on the core sector basket.

c)      The third column captures high-frequency MOM growth, which is negative for the third consecutive month. In August 2022, 4 out of the 8 core sectors have shown positive growth on MOM basis, including natural gas, fertilizers, steel and electricity. However, the negative impact of coal, crude oil, refinery products and cement resulted in overall MOM contraction of -1.5%.

The 10-year core sector story

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

Year	2012-13	2013-14	2014-15	2015-16
Core Sector Growth (%)	3.8%	2.6%	4.9%	3.0%
Year	2016-17	2017-18	2018-19	2019-20
Core Sector Growth (%)	4.8%	4.3%	4.4%	0.4%
Year	2020-21	2021-22	2022-23 (5 mths)
Core Sector Growth (%)	-6.4%	10.4%	9.8%

Data Source: DPIIT

We have 5-months data for FY23 so the picture is fairly representative. The full year data for FY22 was impressive at +10.4% but that was on a negative base. However, the way FY23 growth has been losing momentum, it does look like Indian core sector growth could end up lower than the previous year. The current year has several major headwinds like recession fears, supply chain bottlenecks, high inflation and an ultra-hawkish monetary policy.

The immediate concerns for the next few months would be the weak rupee (at around 82/$) and the resultant imported inflation. High frequency data of last 3 months betrays a lot of short term pressure on the core sector numbers. That is the real challenge that the Indian economy has to contend with.