Core sector growth for August 2023 jumps to 14-month high of 12.1%

2 Oct 2023 , 08:59 AM

The cumulative core sector growth figures for the first 5 months of FY24. After 8.3% core sector growth in June 2023 and 8.4% in July 2023, the core sector figure got a big boost to 12.1% in August 2023. The good thing is that the strong growth in the core sector in the last 3 months comes on the back of a solid base, so you cannot even attribute to the low-base effect. Just to put things in perspective, 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 typically reported with a lag of one month; which means the August data gets reported on the last day of September.

Before the composition of the core sector, here is a quick look at the context. In the last year and half, the government has been heavily spending on infrastructure capex and the results are visible now in the form of higher core sector growth. The 8 sectors that comprise the core sector basket are the infrastructure pillars of the Indian economy. They include coal, crude oil, refinery products, natural gas, fertilizers, steel, cement, and electricity. What exactly is the significance of core sector growth and what are the externalities for GDP growth? Core sector matters because the core sector basket accounts for 40.27% of overall IIP (index of industrial production) basket, and is an important lead indicator of manufacturing GDP. Within core sector basket, refinery products, electricity and steel have the highest weightage. That is what makes core sector a good lead indicator of GDP growth.

How core sector revisions played out in August 2023?

From a low of 0.7% in October 2022, the core sector growth has consistently picked up momentum in the last few months, with a secular uptrend seen since March 2023. However, what is truly gratifying about August 2023 core sector output is that it has come in at an impressive 12.1% despite a robust base of 4.2% growth in August 2022. Let us quickly look at revisions to the core sector growth. The first revision for July 2023 upgraded the core sector growth by 40 basis points from 8.0% to 8.4%. at the same time, the final revision for May 2023 core sector output also upgraded growth by 20 bps from 5.0% to 5.2%. Revisions are decisively positive and bode well for August 2023 numbers; going ahead.

Months	Overall (%)	Coal (%)	Crude Oil (%)	Natural Gas (%)	Refinery (%)	Fertilizers   (%)	Steel  (%)	Cement (%)	Electricity   (%)
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	4.2	11.7	-2.8	2.7	1.5	9.7	12.1	-0.2	-1.6
Apr-23	4.6	9.1	-3.5	-2.9	-1.5	23.5	16.6	12.4	-1.1
May-23	5.2	7.2	-1.9	-0.3	2.8	9.7	12.0	15.9	0.8
Jun-23	8.3	9.8	-0.6	3.5	4.6	3.4	20.8	9.9	4.2
Jul-23	8.4	14.9	2.1	8.9	3.6	3.3	14.2	6.9	8.0
Aug-23	12.1	17.9	2.1	10.0	9.5	1.8	10.9	18.9	14.9

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 for a period of 13 months between August 2022 and August 2023. The month of August 2023 has been decisively positive for the core sector and that momentum has been sustained since March. During the period, the core sector has gradually moved up from 4.2% to 12.1%; with a consistent and progressive uptrend. Out of the 8 core sectors, all the 8 showed positive growth in August 2023 on a yoy basis; a trend that is a repeat of July 2023. Even the generally lacklustre crude oil output showed an improvement in August 2023. The average growth of 12.1% is reflective of a sustenance of the core sector output growth at elevated levels. What really stands out is the number of core sectors growing in double digits in August 2023. Cement, coal, electricity, steel, and natural gas grew in double digits while refinery products output grew at an impressive 9.5%. Barring crude oil and fertilizers (where growth was tepid), the other core sectors showed bumper growth in August 2023.

August 2023 – How sectors defined the core sector narrative

August 2023 was the second month in succession with 100% strike rate with all the 8 core sectors in the green. Even segments like crude oil, refinery products and natural gas, which have been under pressure for most of the months, have shown positive traction thanks to the sustained efforts made by the government and the oil companies. But, first let us look at the leaders in the core sector, which managed to boost the overall growth to 12.1% in the month of August 2023.

Let us turn to the core sectors that were predominantly the leaders. In terms of percentage growth, cement led the way with 18.9% growth on the back of robust demand coming from the infrastructure and construction sector. The boost to power output, initiated by the government resulted in 17.9% in coal output growth and 14.9% growth in electricity output. Among other core sectors that showed impressive growth in August 2023 were steel at 10.9%, natural gas output at 10.0% and refinery products at 9.5%.

Other sectors in the core sector basket grew at a more subdued rate. For example, crude oil may have grown at just 2.1%, but coming on the back of persistent negative growth, this is surely impressive. Fertilizers growth tapered to 1.8% as the typical monsoons demand has been waning with the conclusion of the sowing season for the Kharif crop. The next boost would be the Rabi season, and a lot will predicate on when this Rabi sowing actually starts. The good news is that the high weight sectors like refinery products, steel, electricity, and coal (76% between them) are seeing robust growth; and that is making all the difference.

High frequency core sector growth for August 2023

Till this point, our focus has been on yoy growth. However, the yoy growth does not capture the short term fluctuations in data points. That is where the high frequency data in the form of MOM (month-on-month) growth in the core sector components comes in handy. The shaded column represents the high frequency MOM data; which provides a short term picture of the core sector performance. The YOY growth is vulnerable to the base effect and the gaps are captured by the high frequency growth column.

Core Sector Component	Weight	Aug-23 (YOY) %	Aug-23 (MOM) %	FY24 Cumulative (%) *
Coal	10.3335	+17.9%	-1.5%	+11.5%
Crude Oil	8.9833	+2.1%	-0.6%	-0.4%
Natural Gas	6.8768	+10.0%	+1.6%	+3.9%
Refinery Products	28.0376	+9.5%	+0.7%	+3.7%
Fertilizers	2.6276	+1.8%	+1.1%	+7.5%
Steel	17.9166	+10.9%	-0.8%	+14.8%
Cement	5.3720	+18.9%	+8.8%	+12.7%
Electricity	19.8530	+14.9%	+7.8%	+5.3%
Core Sector Growth	100.0000	+12.1%	+2.5%	+7.7%

Data Source: DPIIT (* FY24 is 5-months data)

The high frequency data had turned slightly negative in June and July 2023. From -0.9% in June, the MOM core sector growth worsened to -2.2% in July 2023. However, August 2023 saw the MOM core sector growth bouncing back to +2.5%. However, there are two things to keep in mind. The big contributors to the yoy growth in terms of weightage and growth like coal and steel are seeing negative short term trends. In fact, out of 8 core sector components, 5 are in the positive on MOM basis and 3 are in the negative. Most of the positive traction has come from just two sectors viz. cement and electricity. That could still make the MOM growth in core sector volatile in the coming months.

Charting core sector growth over the last decade

Here is how core sector growth has panned out over last decade. From FY13 to FY23, we have pinned full year data. For FY24, it is 5 months data from April to August, which should give a reasonable clear picture. However, for better comparison, we have also added the comparable period of 5 months for the last two fiscal years (shaded in grey).

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	0.03	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)	7.8	14.8	-1.7	1.6	4.8	11.3	9.3	8.7	8.9
2021-22(Apr-Aug)	19.4	12.5	-3.1	21.0	12.3	-1.5	44.7	44.3	15.4
2022-23(Apr-Aug)	10.0	22.7	-1.1	2.6	10.8	11.4	6.8	10.7	10.6
2023-24(Apr-Aug)	7.7	11.5	-0.4	3.9	3.7	7.5	14.8	12.7	5.3

Data Source: DPIIT (FY2023-24 data is for 4 months)

What are the major takeaways from the core sector data trends in the last decade?

• FY24 growth in the first 5 months is quite impressive at 7.7%, despite a higher base. This is at par with FY23 at 7.8%. However, if you compare the 5 month period of FY24 with FY23 and FY22, then the current year still lags. It remains to be seen if there is pressure in the second half of FY24.
• It is important to use the longer term annual data for a more secular view. From the pre-COVID levels of infrastructure output, the overall output is 20-22% higher and this is after the negative impact we had during the pandemic shutdown. That means; post pandemic, Indian core sector has bettered the pre-COVID average growth rate and that is an outcome of the infrastructure thrust provided by the central government.
• Over the last 11 years, the average core sector growth has been 3.6%, so at 7.7% cumulative growth in FY24, the core sector is a good 300 bps better than the average. This is despite the headwinds at a domestic and international level.

In terms of capital spending and infrastructure spending, the last decade was like the lost decade. The government has triggered a revival in the capital cycle and the private sector is taking over. That is evident from the way FPIs are falling over each other to buy capital goods stocks in India. Behind the overflowing order books of capital goods companies, there is a subtle story that is reflected in these core sector numbers.