May 2022 core sector up 18.1% even on solid base effect

2 Jul 2022 , 08:36 AM

The core sector growth at 18.1% for May 2022 is special in two ways. Firstly, this growth comes on top of a 16.4% growth base in May 2021. There is an issue of base adjustment, but it is still stellar growth on a solid base. Secondly, the May 2022 core sector growth is the highest in the last 13 months and also accentuates the core sector growth moving to a sharply higher trajectory. Not to forget, this comes amidst rising inflation, supply chain constraints and central bank hawkishness.

A good barometer of how future data will pan out is the revisions in core sector numbers. The first revision in core sector growth for April 2022 marked a 90 bps upgrade from 8.4% to 9.3%. However, the final review of February 2022 core sector resulted in the growth tapering 10 bps lower from 6.0% to 5.9%. One way to understand the pre-COVID impact is to look at May 2022 core sector growth over May 2020 growth. Over a 2 year period, the core sector for May 2022 is 37.5% above the May 2020 levels. While weak COVID base did play a role, the reality is that infrastructure sector is back to its old growth ways.

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

Let us spend a moment to understand why core sector or infrastructure sector has larger ramifications for IIP and GDP growth. Core sector has a weightage of 40.27% in IIP basket. The infrastructure sector is growing on yoy and on pre-COVID basis. Not only does infrastructure have strong externalities for growth levers, but the high weightage makes IIP and GDP closely related to core sector growth. Core sector has grown in May 2022, in spite of negative headwinds for the Indian economy and a challenging global environment.

How the 8 core sectors panned out in May 2022?

In May 2022, all the 8 core sectors were in the green. Let us begin with the high growth segments. Coal production was up 25.1% yoy on a major output thrust and boost to captive mining. Cement output was up 26.3% due to better demand ahead of monsoons. Fertilizers was up 22.8% while electricity grew 22% on a yoy basis. While Fertilizers got a boost ahead of the Kharif season, electricity output growth was also driven by non-conventional sources.

Among the other key growth sectors, refinery products grew 16.7% on record GRMs while steel production grew 15% despite pressure on auto sales. Refinery has the highest weightage of 28.03% in the core sector basket and hence has a disproportionately high impact. Natural gas and crude oil also witnessed growth of 7% and 4.6% respectively in the month of May 2022. Favourable prices helped both stay in the positive.

The 18.1% overall core sector growth can be attributed to strong growth from some of the high weightage sectors like refinery products, electricity generation and steel production. These 3 segments account for more than 65% of the total weightage of the core sector and robust growth in all these segments was a key driver in May 2022.

Core sector from a high frequency perspective

Here we look at the break-up of the core sector based on YOY indicators and high-frequency MOM growth. We also look at the FY23 cumulative numbers although this is just 2 months to begin with, but it will gradually build up over time.

Core Sector Component	Weight	May-22 (YOY) %	May-22 (MOM) %	FY23 Cumulative (%) *
Coal	10.3335	+25.1%	+0.2%	+26.9%
Crude Oil	8.9833	+4.6%	+3.2%	+1.8%
Natural Gas	6.8768	+7.0%	+3.7%	+6.7%
Refinery Products	28.0376	+16.7%	+1.9%	+12.8%
Fertilizers	2.6276	+22.8%	+31.1%	+16.3%
Steel	17.9166	+15.0%	+5.0%	+8.4%
Cement	5.3720	+26.3%	-3.2%	+15.9%
Electricity	19.8530	+22.0%	+1.5%	+16.7%
Core Sector Growth	100.0000	+18.1%	+2.6%	+13.6%

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

The big data point to watch out is the fourth column of the MOM growth (shaded column), which represents 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, the core sector growth continues to be positive showing favourable short term momentum. Seven out of the 8 core sectors have shown positive high frequency momentum, which is a good indicator. Let us look at some of the key drivers in the above table.

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 and steel have a high combined weight of over 65%.

b)      The second column is  the break-up of yoy core sector growth of 18.1%. Here, all 8 core sectors are in the positive. Big positive thrust has come from refinery products, electricity generation and steel production.

c)      The third column captures high-frequency MOM growth. This is the big story for May 2022 with 7 out of 8 core sectors recording positive 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 is the perfect indication that in May 2022, even short term momentum is favourable. This is despite headwinds like the war, supply chain constraints, central bank hawkishness relentless inflation etc. Clearly, core sector is showing resilience.

Taking a macro view of core sector growth over the last decade

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 (2 mths)
Core Sector Growth (%)	-6.4%	10.4%	13.6%

Data Source: DPIIT

For now, we just have 2-months data for FY23 and hence the image is still hazy. The full year data for FY22 looks impressive at +10.4%, surely the best in the last decade; albeit on a negative base 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. That is why, it is crucial to see how FY23 pans out, from 13.6%.

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 rupee weakness is something the Indian economy will have to really handle very smartly.