April Core sector up +56.1% on base effect but falls sequentially

Core sector growth for Mar-21 was at an all-time high of +56.1%. But before we start the celebration, remember that this is totally base effect.

Jun 01, 2021 08:06 IST India Infoline News Service

Core sector growth for Mar-21 was at an all-time high of +56.1%. But before we start the celebration, remember that this is totally base effect. In fact, the last two months core sector figures for March and April 2021 are looking like an exact mirror image of the same months in the previous year.

Those were the pandemic months when output shrank to insane levels and what we see now is the outcome of core sector output just reverting to the normal. In the previous month, we had mentioned that the base effect would favour core sector and if you look at the chart below, you can easily decipher that this base effect would last 3-4 months more.

Base effect yes, but growth is being upgraded too

Certainly, the base effect magnified the core sector growth for Apr-21 and that is hardly surprising because when growth falls by -37.9%, even a 56.1% bounce from the base, does not bring you back to the baseline. That is pure mathematics but we will come back to that later. The good news is that core sector upgrades have still been favourable. For example, the Mar-21 core sector growth was upgraded from 6.8% to 11.4%. Similarly, the Jan-21 core sector growth also got upgraded from 0.9% to 1.3%. Apparently, deeper data is only showing better growth and that bodes well for future data flows too.

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

In the previous month core sector report, we saw how the full-year core sector contracted by -7.0% in FY21. That figure has further improved to -6.5% after the revised estimates are considered for the month of March at 11.4% instead of 6.8% core sector growth. However, the real challenge is the impact of COVID 2.0.

COVID 2.0 makes a dent on sequential core sector numbers

Before we go into the breakup of the core sector, the big question is whether COVID 2.0 has had an impact on core sector? The answer is an emphatic yes, if you look at sequential numbers i.e. month-on-month. For example, if you look at yoy core sector, which is what we normally do, the base effect is bound to be favourable. But the real story comes out when you look at the month-on-month growth numbers.

One must give due credit to the MOSPI that they have been transparent enough to also present the sequential month-on-month data to give the true picture of core sector. For the month of April, the sequential core sector growth was down by -15.1%. That is the real impact of COVID 2.0 with de-growth across all the 8 components with the lowest de-growth in natural gas at -1.1% and the highest de-growth in coal at -46%. Hopefully, this should also get rectified once the economy opens, but the moral of the story is that the impact of COVID 2.0 on core sector is real and visible in sequential numbers.

How the 8 core sectors fared; yoy and sequentially

On a yoy basis, 7 out of the 8 core sectors showed positive growth with crude oil being the only core sector to show negative growth on a yoy basis. However, on a sequential month-on-month basis, all the 8 sectors have shown negative growth and that is largely an outcome of the COVID 2.0 effect. The table below captures the gist of this dichotomy.

Core Sector Component YOY Growth – April 2021 (%) MOM Growth – April 2021 (%)
Coal 9.5% -46.0%
Crude Oil -2.1% -4.6%
Natural Gas 25.0% -1.1%
Refinery Products 30.9% -8.2%
Fertilizers 1.7% -5.3%
Steel 400.0% -20.7%
Cement 548.8% -15.2%
Electricity 38.7% -3.3%
Overall Core Sector Growth 56.1% -15.1%
Data Source: DPIIT

We mentioned this previously and reiterate that the MOSPI must be commended for giving such a transparent analysis of the core sector sequential numbers, which clearly brings out the dichotomy caused by COVID 2.0. The numbers point to 2 key challenges for the government on the core sector front. Firstly, the impact of COVID 2.0 has to be reversed at the earliest to ensure that the dividends of the recovery are not lost. Secondly, there is need of real and genuine growth recovery, once the base effect wanes in another 3-4 months.

India FY21 core sector growth gets upgraded to -6.5% post revision

Core sector with a 40.27% weight in IIP needs to provide the much-needed push if Indian economy has to build on the advantages of GDP recovery in the Mar-21 quarter.

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 Apr-Mar FY22
Core Sector Growth (%) -6.5% 56.1
Data Source: DPIIT

The core sector contraction for fiscal year FY21 improved from -7.0% to -6.5% due to Mar-21 core sector being upgraded from 6.8% to 11.4%. The government has already given hints of another fiscal stimulus. It is now time to walk that talk!

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