May-24 core sector tapers to 6.3% due to higher base effect

1 Jul 2024 , 09:00 AM

CORE SECTOR GROWTH TAPERS TO 6.3% IN MAY 2024

The monthly core sector growth for May 2024 tapered to 6.28%, which is lower compared to the revised core sector growth for April 2024. Let us quickly look at why the core sector is so critical in the overall macroeconomic analysis. The core sector captures the output growth of 8 of the most important infrastructure industries that form the building blocks of the economy. These 8 building blocks of the core sector basket are; coal output, crude oil, refinery products, natural gas, fertilizers, steel, cement, and electricity. Here is something on their weightage. The core sector basket is about 40.27% of the IIP basket, so it impacts growth in multiple ways. For May 2024, it was once again electricity that led the way with 12.81% growth followed by coal output at 10.23%. The other significant contributors to the core sector growth in May 2024 were steel at 7.64% and natural gas at 7.51%. Three out of the eight core sectors reported yoy contraction in the month of May 2024. The lower core sector growth in May 2024, compared to 6.66% in April 2024, can be attributed to the higher base effect, with the corresponding base up by 63 basis points.

CORE SECTOR AVERAGES AND CORE SECTOR REVISIONS

Before we get into the core sector revisions, let us quickly look at how the core sector components have averaged over the last 1 year in terms of output growth. The overall core sector in the last one year has averaged around 7.6%, which is quite positive. Among the major drivers were coal output at 11.89%, natural gas at 7.07%, steel output at 11.72%, cement at 7.26% and electricity generation at 8.50%. These were the big drivers in terms of the shifts in the core sector growth. Among the laggards, crude oil output at 0.95% and fertilizers at 1.79% proved to be the major drag on the core sector growth. The core sector with the highest weightage (Refinery Products), grew at a modest 3.92% on an average.

Each core sector number goes through 2 revisions. The first revision happens after a month and the final revision happens after 3 months. Let us look at how the revisions panned out for core sector growth. The first revision for April 2024 raised core sector growth by 51 bps from 6.15% to 6.66%. The final revision for February 2024 upped core sector growth by just 1 basis point from 7.08% to 7.09%. This bodes well for May-24 numbers; as it increases the prospects  of the May core sector number also being upgraded.

BREAKING DOWN THE MAY 2024 CORE SECTOR GROWTH

The table below captures the breakdown of the 6.28% core sector growth for May 2024 into the 8 components. Out of the 8 core sectors, 3 sectors (crude oil, fertilizers, and cement) reported negative core sector growth while the other 5 sectors reported positive growth. The ratio has come under pressure in the latest month and that could be attributed to the election related slowdown in government driven capex.

Months	Overall (%)	Coal (%)	Crude (%)	Natural Gas (%)	Refinery (%)	Fertilizers  (%)	Steel  (%)	Cement (%)	Electricity  (%)
May-23	5.23	7.23	-1.94	-0.33	2.78	9.71	11.96	15.92	0.83
Jun-23	8.37	9.76	-0.56	3.48	4.58	3.44	21.31	9.95	4.22
Jul-23	8.55	14.95	2.06	8.92	3.56	3.29	14.92	6.89	7.95
Aug-23	13.42	17.89	2.15	9.95	9.49	1.79	16.35	19.74	15.31
Sep-23	9.44	16.03	-0.36	6.57	5.55	4.21	14.79	4.75	9.87
Oct-23	12.67	18.41	1.31	9.93	4.24	5.35	13.61	16.98	20.34
Nov-23	7.94	10.90	-0.40	7.60	12.44	3.36	9.77	-4.79	5.73
Dec-23	5.05	10.75	-1.03	6.59	4.04	5.85	8.28	3.81	1.23
Jan-24	4.13	10.57	0.70	5.52	-4.29	-0.56	9.19	4.04	5.67
Feb-24	7.09	11.61	7.89	11.26	2.64	-9.51	9.41	7.83	7.60
Mar-24	6.00	8.71	2.02	6.32	1.55	-1.28	6.44	10.58	8.65
Apr-24	6.66	7.51	1.65	8.60	3.94	-0.75	8.75	-0.47	10.23
May-24	6.28	10.23	-1.13	7.51	0.48	-1.66	7.64	-0.79	12.81

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

The table above provides the core sector growth trend for the 13 months from May 2023 to May 2024. The positive momentum has been sustained since March 2023; barring some minor aberrations in the trend; but these were largely on account of the base effect. That is also evident from the average growth rates of last 13 months as we saw in the previous item. That explains why the full year core sector growth stood at a robust level of 7.60% for FY24; and that momentum has continued in FY25 also. One reason for the lower core sector growth in the current month compared to the previous month is the higher base effect by 63 bps. However, the original April number at 6.15% was lower than the current May figure and it is only post the revision that the April 2024 number has gone up to 6.66%.

Out of the 8 core sectors in May 2024, 5 sectors showed yoy positive growth traction in and 3 sectors showed negative growth momentum. Fertilizers contracted by -1.66% yoy, crude oil contracted -1.13% and cement contracted -0.79% yoy. All these can be attributed to delays in decision making on account of the elections. Refinery products have a weight of 28.04% in the core sector basket, so the tepid growth of 0.48% in May 2024 actually turned out to be a dampener overall. Fertilizer weakness has come from slackening momentum in agricultural output post the Rabi season; but with normally monsoons, the Kharif demand should hopefully pick up. Cement growth has been hit due to several infrastructure projects seeing halting progress. However, with the election process completed and the NDA government in place, things should warm up now. Also, the focus will shift to the full budget to be presented by the government in late July 2024.

HIGH FREQUENCY CORE SECTOR GROWTH (MAY 2024)

The yoy growth captures point-to-point growth, but misses out on high frequency trends. That is because the yoy growth is too sensitive to the base effect. Here we additionally look at the high frequency MOM data also. Here is what we read from the MOM data.

Core Sector Component	Weight	May-24 (YOY) %	May-24 (MOM) %	FY25 Cumulative (%) #
Coal	10.3335	+10.23%	+6.58%	+8.90%
Crude Oil	8.9833	-1.13%	+2.11%	+0.23%
Natural Gas	6.8768	+7.51%	+5.19%	+8.04%
Refinery Products	28.0376	+0.48%	+2.82%	+2.16%
Fertilizers	2.6276	-1.66%	+15.35%	-1.24%
Steel	17.9166	+7.64%	-0.34%	+8.20%
Cement	5.3720	-0.79%	-0.43%	-0.63%
Electricity	19.8530	+12.81%	+7.26%	+11.55%
Core Sector Growth	100.0000	+6.28%	+3.75%	+6.46%

Data Source: DPIIT (# FY25 is just 2-months data)

After deeply negative MOM core sector contraction in April 2024, the month of May has seen a turnaround in the high frequency core sector story. For the month of May 2024, the MOM growth in core sector was decisively positive in 6 out of the 8 core sectors, which is the reason MOM core sector basket growth stands at +3.75% overall. The positive impact on high frequency core sector growth was led by fertilizers; followed by electricity and coal production. Steel and cement saw negative MOM growth, which can be attributed largely to the election uncertainty as infrastructure related decisions have been in cold storage for some time now. But the MOM story in May 2024 is surely positive.

CHARTING CORE SECTOR GROWTH – LONG TERM STORY

Here is a quick take on the core sector growth over the last 12 financial years from FY13 to FY24. In addition, for a better comparison, we have also provided 2-month (Apr-May) cumulative data for the last 3 fiscal years.

Months	Overall (%)	Coal (%)	Crude Oil (%)	Natural Gas (%)	Refinery (%)	Fertilizers  (%)	Steel  (%)	Cement (%)	Electricity  (%)
2012-13(Apr-Mar)	3.82	3.19	-0.60	-14.42	7.15	-3.32	7.92	7.46	4.00
2013-14(Apr-Mar)	2.56	0.95	-0.19	-12.92	1.39	1.47	7.32	3.74	6.05
2014-15(Apr-Mar)	4.94	8.05	-0.87	-5.33	0.17	1.30	5.11	5.91	14.81
2015-16(Apr-Mar)	2.98	4.83	-1.39	-4.72	4.88	7.02	-1.28	4.62	5.69
2016-17(Apr-Mar)	4.76	3.19	-2.53	-1.03	4.89	0.21	10.74	-1.23	5.84
2017-18(Apr-Mar)	4.28	2.57	-0.90	2.86	4.58	0.03	5.57	6.33	5.32
2018-19(Apr-Mar)	4.37	7.38	-4.15	0.82	3.13	0.34	5.09	13.31	5.16
2019-20(Apr-Mar)	0.36	-0.35	-5.95	-5.64	0.22	2.67	3.36	-0.88	0.94
2020-21(Apr-Mar)	-6.39	-1.87	-5.21	-8.17	-11.22	1.65	-8.66	-10.80	-0.49
2021-22(Apr-Mar)	10.41	8.55	-2.64	19.24	8.93	0.69	16.94	20.77	7.96
2022-23(Apr-Mar)	7.80	14.84	-1.72	1.60	4.82	11.31	9.26	8.70	8.89
2023-24(Apr-Mar)	7.59	11.77	0.61	6.06	3.56	3.72	12.44	8.86	7.06
2022-23(Apr-May)	14.30	31.83	1.80	6.69	12.84	16.39	8.59	15.91	17.42
2023-24(Apr-May)	4.91	8.16	-2.73	-1.57	0.66	15.70	14.20	14.11	-0.13
2024-25(Apr-May)	6.46	8.90	0.23	8.04	2.16	-1.24	8.20	-0.63	11.55

Data Source: DPIIT (FY2024-25 data is for just 2 months)

Here are the major takeaways from the core sector data trends in the last decade.

• FY24 growth was impressive at an upgraded 7.59%, and only slightly lower than FY23 at 7.80%. The FY22 growth at 10.41% was on the back of a low COVID base. FY24 is on a very high base after 2 successive years of frenetic growth in core sector output.
• From the pre-COVID levels, infrastructure output is 21% higher and this is after factoring in the negative impact of the pandemic. In short; post-pandemic, Indian core sector has bettered pre-COVID average growth rate. That is the good news.
• Over the last 11 years, the average core sector growth has been around 3.62%, so at 7.59% cumulative growth in FY24; and 6.46% in FY25, India seems to be certainly better off as far as infrastructure growth is concerned.

Last but not the least, the big story is not just about the core sector but the troika of 3 data points that are absolutely flattering for the Indian economy.

WHAT WE READ FROM THE CORE SECTOR MAY 2024 DATA

There are broadly 3 takeaways from the core sector numbers for the month of May 2024. Remember, core sector data is published with a lag of one month; which means the data for May will be published on the last working day of June and so on. Here is what we read from the core sector data.

• There has been a decisive upward move in the core sector growth post the pandemic. This can be attributed to a conscious decision by the government to trigger growth through heavy investments in capex. That appears to have paid off, as is evident from the recent numbers being substantively higher than the average of the last 10 years.
• The infrastructure thrust of the government has brough about decisive and structural growth triggers in four of the eight sectors viz. coal sector, steel, cement, and electricity output. However, the challenge continues to be fertilizers which is cyclical and hydrocarbons, where India remains vulnerable to global price and supply fluctuations.
• Core sector has a multiplier effect, which explains why the GDP growth annually is much higher than the core sector growth. Sectors like power, cement and steel tend to create a multiplier effect on demand. That is one of the reasons, why a robust core sector is key to sustainable long term GDP growth in India.

For a long time, core sector growth was the missing link. That appears to have been bridged, thanks to the aggressive outlays by the government. For now, we await more elaborate cues on the core sector outlook coming from the full budget in July 2024.