Mar-22 core sector tapers to 4.31% as coal and crude oil drag

2 May 2022 , 08:47 AM

After a long time, we have 13 consecutive months of positive core sector growth. Compared to Feb-22, the core sector growth for Mar-22 has tapered from 6% to 4.3%, but that is more due to the base effect. In fact, considering the sharp spike in core sector growth in Apr-21, one can logically expect flat to negative core sector growth in the coming month. However, the good news is that on a median basis, the core sector growth in the last 6 months has sustained above the 4% mark. Let us first take a look at the core sector revisions.

Final revisions in core sector growth for Dec-21 marked a 30 bps upgrade from 3.8% to 4.1%. The first revision for Feb-22 raised core sector growth by 20 bps from 5.8% to 6.0%. If you consider core sector numbers for Mar-22 and compare with Mar-20, it is up 17.44%; which is perhaps the first decisive indication that the Indian economy is starting to grow over pre-COVID levels. In another 3 months, the base effect story and the COVID story would become history and core sector growth would purely be on merit.

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

Core sector or infrastructure sector has larger ramifications for IIP and GDP growth. It has a weightage of 40.27% in IIP growth. If you look at a 2-year comparison of FY22 over FY20, then Jul-21 was the first month when core sector was above Jul-19 levels. Between Aug-21 and Oct-21, this advantage gradually built up before losing momentum in Nov-21 due to the Omicron scare. In Dec-21, the 2-year growth over pre-COVID levels picked up to 4.24% and further to 5.05% in Jan-22. Feb-22 has again tapered on a 2-year basis to just about 2.31% but in Mar-22, two-year growth is back to an imposing 17.44%.

FY22 core sector grows 333 bps over FY20 levels

Core sector growth on a monthly basis is useful as a high-frequency barometer but it is vulnerable to the base effect. It is a good momentum indicator, but a more structural barometer is the cumulative core sector data of the 12-months of FY22 juxtaposed with the corresponding 12 months of FY20. The cumulative picture smoothens out the monthly vagaries and periodic base effects and paints a realistic picture.

The cumulative growth for Apr-Mar (FY-22) period is pegged at +10.4%. This is against -6.4% contraction in the Apr-Mar (FY21) period, which was the direct impact of COVID triggered lockdowns. Thus, on a pre-COVID basis, core sector for FY21 is 3.33% above corresponding FY20 levels; an encouraging signal in last few months of exorcising the ghost of COVID.

Refining and Steel boost core sector growth in Mar-22

Here we look at the break-up of the core sector based on YOY indicators, pre-COVID growth and high-frequency growth.

Core Sector Component	Weight	Mar-22 (YOY) %	Mar-22 (MOM) %	FY22 over FY21 (%)
Coal	10.3335	-0.1%	+20.2%	+8.5%
Crude Oil	8.9833	-3.4%	+11.2%	-2.6%
Natural Gas	6.8768	+7.6%	+11.9%	+19.2%
Refinery Products	28.0376	+6.2%	+14.2%	+8.9%
Fertilizers	2.6276	+15.3%	+5.2%	+0.7%
Steel	17.9166	+3.7%	+9.7%	+16.9%
Cement	5.3720	+8.8%	+17.5%	+20.8%
Electricity	19.8530	+4.9%	+17.4%	+7.8%
Core Sector Growth	100.0000	+4.3%	+14.6%	+10.4%

Data Source: DPIIT

The big data point to watch out is the fourth column of the MOM growth, which is the high frequency growth. Last month, the MOM growth had dipped into the negative due to the impact of the war, supply chain constraints and Fed hawkishness on output. That appears to have bene reversed, but will come back to that point in detail.

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 4.3%. Here, 6 out of 8 core sectors are in the positive. While crude has remained in the negative for some time, coal dipped marginally on supply bottlenecks, while fertilizers output bounced back.
3. On a yoy basis, the big percentage drivers of growth are Refining Products, Natural Gas, Cement and electricity, of which refining and electricity contribute substantially due to their weight. Robust natural gas prices and the power thrust have been big drivers.
4. The third column captures high-frequency MOM growth. This is the big story for Mar-22 with all eight sectors witnessing positive growth and six out of eight sectors showing double-digit growth. This is an important data point as it shows that the negative impact of the war and the supply chain constraints have been temporary and the infrastructure sector has picked itself up quickly to get back to normal levels.
5. The last column shows 2-year cumulative growth for FY22. The 2-year growth has evolved as under: Nov-21 (108 bps), Dec-21 (157 bps), Jan-22 (200 bps), Feb-22 (201 bps) and Mar-22 (333 bps). This build-up is the big core sector story of FY22.

How does FY22 core sector compare with 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
Core Sector Growth (%)	-6.4%	10.4%

Data Source: DPIIT

With data for FY22 in front of us, it surely looks impressive at +10.4%, undoubtedly the best in the last decade. However, this comes on top of a negative growth of -6.4% in FY21. However, the base effect is waning and FY23 will back to business with the COVID story laid to rest. The 2 year growth in core sector i.e. FY22 over FY20, stands at 3.33%. That is at par with the average core sector growth in the 8 years prior to COVID.

The month-on-month core sector growth does indicate that India may have brushed off global worries for now. However, there is a wall of worry that the Indian economy has to contend with. Firstly, there is a global double whammy in the form of Ukraine war combined with China lockdowns. Secondly, it remains to be seen how RBI reacts to Fed hawkishness. Finally, Q4 results have shown that rural slowdown and input inflation are real problems to contend with. It could be challenging times ahead!