Core sector growth for April 2023 stays flat at 4.3%

1 Jul 2023 , 09:16 AM

On the last day of June 2023, the Office of the Economic Advisor announced core sector growth for May 2023 at a flat 4.3%. The core sector is a barometer of infrastructure growth in India, and combines 8 basic building blocks of the economy. In India, the core sector growth is reported with a lag of one month. Core sector growth comprises of coal, crude oil, refinery products, natural gas, fertilizers, steel, cement, and electricity. Let us understand the significance of core sector growth? Core sector basket accounts for 40.27% of overall IIP basket, and is an important lead indicator of manufacturing GDP. Within core sector basket, refinery products, electricity and steel have highest weightage.

It may be recollected that in October 2022, core sector growth dipped below 1%, but has since recovered. While core sector growth did bounce to a high of 9.7% in January 2023, it has since tapered to 4.3% mark; largely on account of an expanding base. For April 2023, the core sector growth was sequentially flat at 4.3%. However, the base growth in May 2022 was 19.3%, so in that backdrop, this is a good performance. Let us quickly look at revisions. The first revision for April 2023 upgraded the core sector growth by 70 basis points to 4.3%. The final revision for February 2023 pegged core sector growth 20 bps higher from 7.20% to 7.40%. Revisions are decisively positive and that bodes well for May 2023 core sector too.

Months	Overall (%)	Coal (%)	Crude Oil (%)	Natural Gas (%)	Refinery (%)	Fertilizers   (%)	Steel  (%)	Cement (%)	Electricity   (%)
May-22	19.3	33.5	4.6	7.0	16.7	22.9	15.1	26.2	23.5
Jun-22	13.1	32.1	-1.7	1.2	15.1	8.2	3.3	19.7	16.5
Jul-22	4.8	11.4	-3.8	-0.3	6.2	6.2	7.5	0.7	2.3
Aug-22	4.2	7.7	-3.3	-0.9	7.0	11.9	5.8	2.1	1.4
Sep-22	8.3	12.1	-2.3	-1.7	6.6	11.8	7.7	12.4	11.6
Oct-22	0.7	3.8	-2.2	-4.2	-3.1	5.4	5.8	-4.2	1.2
Nov-22	5.7	12.3	-1.1	-0.7	-9.3	6.4	11.5	29.1	12.7
Dec-22	8.3	12.3	-1.2	2.6	3.7	7.3	12.3	9.5	10.4
Jan-23	9.7	13.6	-1.1	5.2	4.5	17.9	14.3	4.7	12.7
Feb-23	7.4	9.0	-4.9	3.1	3.3	22.2	12.4	7.4	8.2
Mar-23	3.6	12.2	-2.8	2.7	1.5	9.7	8.8	-0.6	-1.6
Apr-23	4.3	9.1	-3.5	-2.8	-1.5	23.5	15.3	12.0	-1.1
May-23	4.3	7.2	-1.9	-0.3	2.8	9.7	9.2	15.5	-0.3

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

The table above is a detailed, analysis of the overall core sector growth trend between May 2022 and May 2023. The month of May 2023 has been mixed. Out of the 8 core sectors, 3 sectors have shown negative growth while 5 sectors have shown positive growth. Hence, the average growth of 4.3% may not be very reflective of the underlying churn in the infrastructure space overall. In terms of positive impact; steel, coal, cement, and fertilizers are leading the way for the core sector.

May 2023 – Sectors that defined the infrastructure growth story

May 2023 saw only 5 out of 8 core sectors in the green with 3 in the red. Let us focus on the core sectors that contracted in May 2023. Crude oil output fell by -1.9% while natural gas output also fell by -0.3% in May 2023. Among others, electricity output also fell by -0.3% in May 2023. Clearly, energy output bore the brunt of the pressure on the core sector.

Let us look at the leaders. In terms of percentage growth, cement led the way with 15.5% growth after robust demand coming from infrastructure space. A positive policy framework on pricing fertilizers boosted output while steel also got a heads up from the infrastructure focus. While fertilizers saw 9.7% growth, steel grew by 9.2% in May 2023. The other two sectors that saw a positive bounce were coal output at 7.2% and refinery products at 2.8%. Lower crude prices have boosted the gross refining margins and that has helped refinery products. Coal output has got a leg up from persistent summer electricity demand and it has been trying its level best to meet the growing demand of the thermal power space.

Sneak peek at the high frequency data for May 2023

Till this point, our focus has largely been on yoy growth in core sector. While that is the popular benchmark, it is extremely vulnerable to the base effect. Here we look at the high frequency data as captured by the month-on-month (MOM) core sector growth.

Core Sector Component	Weight	May-23 (YOY) %	May-23 (MOM) %	FY24 Cumulative (%) *
Coal	10.3335	+7.2%	+3.9%	+8.2%
Crude Oil	8.9833	-1.9%	+5.0%	-2.7%
Natural Gas	6.8768	-0.3%	+6.3%	-1.5%
Refinery Products	28.0376	+2.8%	+6.3%	+0.7%
Fertilizers	2.6276	+9.7%	+16.4%	+15.7%
Steel	17.9166	+9.5%	-0.7%	+12.2%
Cement	5.3720	+15.5%	-0.2%	+13.7%
Electricity	19.8530	-0.3%	+3.6%	-0.7%
Core Sector Growth	100.0000	+4.3%	+3.5%	+4.3%

Data Source: DPIIT (* FY24 is just 2-months data)

The high frequency data is decisively positive for the core sector in May 2023. On a MOM basis, the core sector in May 2023 has expanded by 3.5% a clear contrast to the April 2023 contraction. In May 2023, core sector expanded sequentially in 6 sectors and marginally contracted only in steel and cement. What stands out is the robust performance of the fertilizer sector and the recovery from lower levels visible in crude oil, refinery products and natural gas.

How core sector growth panned out in the previous decade

Here is how core sector growth has panned out over last decade. From FY13 to FY23, we have pinned full year data while for FY24, the data is the annualized effect of 2 months. However, the FY24 data will get increasingly representative as we go along. The growth in core sector across 8 of its components for the last decade are captured in the table.

Months	Overall (%)	Coal (%)	Crude Oil (%)	Natural Gas (%)	Refinery (%)	Fertilizers   (%)	Steel  (%)	Cement (%)	Electricity   (%)
2012-13(Apr-Mar)	3.8	3.2	-0.6	-14.4	7.2	-3.3	7.9	7.5	4.0
2013-14(Apr-Mar)	2.6	1.0	-0.2	-12.9	1.4	1.5	7.3	3.7	6.1
2014-15(Apr-Mar)	4.9	8.0	-0.9	-5.3	0.2	1.3	5.1	5.9	14.8
2015-16(Apr-Mar)	3.0	4.8	-1.4	-4.7	4.9	7.0	-1.3	4.6	5.7
2016-17(Apr-Mar)	4.8	3.2	-2.5	-1.0	4.9	0.2	10.7	-1.2	5.8
2017-18(Apr-Mar)	4.3	2.6	-0.9	2.9	4.6	0.0	5.6	6.3	5.3
2018-19(Apr-Mar)	4.4	7.4	-4.1	0.8	3.1	0.3	5.1	13.3	5.2
2019-20(Apr-Mar)	0.4	-0.4	-5.9	-5.6	0.2	2.7	3.4	-0.9	0.9
2020-21(Apr-Mar)	-6.4	-1.9	-5.2	-8.2	-11.2	1.7	-8.7	-10.8	-0.5
2021-22(Apr-Mar)	10.4	8.5	-2.6	19.2	8.9	0.7	16.9	20.8	8.0
2022-23(Apr-Mar)	7.7	14.9	-1.7	1.6	4.8	11.3	9.0	8.7	8.9
2023-24(Apr-May)	4.3	8.2	-2.7	-1.5	0.7	15.7	12.2	13.7	-0.7

Data Source: DPIIT (FY2023-24 data is for 2 months)

What are the major takeaways from the 10-year trend of core sector data? If you leave out the 10.4% growth in core sector in FY22 (largely due to negative base effect), the FY23 core sector growth is extremely impressive and also the best in last 10 years. Above all, this growth comes on the back of a very high base for FY22; which makes the growth more genuine. Over the last 11 years, the average core sector growth has been 3.6%, so at 4.3% cumulative growth in FY24, the core sector is a good 70 bps better than the average.

In the last 11 years, the core sector growth was flat in FY20 and negative in FY21 due to the COVID pandemic effect. Similarly, in FY22, the core sector was in double digits due to the low base. IF we leave these 3 outliers, the core sector has generally gravitated close to the mean growth of 3.6% in most of the previous fiscal years. However, this was the decade when capital spending has been generally tepid and the Indian economy is expected to see a positive turn in the coming decade. That should be good news for the core sector.