Core sector growth for July 2023 still impressive at 8.0%

1 Sep 2023 , 09:51 AM

After the 8.3% core sector growth in the month of June 2023, the general concern was that there could be a slowdown in core sector growth in July However, the fall in July was marginal, falling just 30 bps at 8.0%. This is despite a very strong core sector growth in the base month of July 2022. 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 typically reported with a lag of one month; which means the July data gets reported on the last day of August and so on. 

It is the composition of the core sector that is a lot more interesting. 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 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. Indirectly, even GDP gets influenced by the core sector robustness.

How core sector revisions looked in July 2023?

After dipping sharply lower in October 2022, the core sector growth has consistently picked up momentum in the last few months. In fact, core sector growth had bounced to a high of 9.7% in January 2023, but then tapered to 4.3% in April and stayed around 5% in May. However, what is gratifying about June 2023 core sector output is that it has come in at an impressive 8.3% despite a high base of 13.1% growth in June 2022. After the strong growth in June 2023, the July core sector was expected to taper closer to 6%. However, July core sector growth came in sharply higher than expected at 8.0%. Let us quickly look at revisions. The first revision for June 2023 upgraded the core sector growth by 10 basis points from 8.2% to 8.3%. The final revision for April 2023 also upgraded core sector growth by 30 bps from 4.3% to 4.6%. Revisions are decisively positive and bode well for July 2023 numbers.

Months	Overall (%)	Coal (%)	Crude Oil (%)	Natural Gas (%)	Refinery (%)	Fertilizers   (%)	Steel  (%)	Cement (%)	Electricity   (%)
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	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	5.0	7.2	-1.9	-0.3	2.8	9.7	10.9	15.3	0.8
Jun-23	8.3	9.8	-0.6	3.5	4.6	3.4	20.8	9.9	4.2
Jul-23	8.0	14.9	2.1	8.9	3.6	3.3	13.5	7.1	6.9

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 July 2022 and July 2023. The month of June 2023 has been decisively positive for the core sector and that momentum has been sustained in July also. Out of the 8 core sectors, all the 8 showed positive growth in July 2023 on a yoy basis. Even the generally lacklustre crude oil output showed an improvement in July 2023. The average growth of 8.0% is reflective of a sustenance of the core sector output growth at elevated levels. In terms of positive impact; Coal, Steel, Natural Gas and Electricity made the bulk of the contribution to core sector growth in July 2023.

July 2023 – How sectors defined the core sector narrative

July 2023 showed a 100% strike rate with all the 8 core sectors in the green with robust gains overall. Even segments like crude oil 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 around 8% in July 2023.

Let us turn to the core sectors that were predominantly the leaders. In terms of percentage growth, coal led the way with 14.9% growth on the back of robust demand coming from the thermal power sector and government pushing coal captive companies to also boost coal output. On the infrastructure boost story, another logical beneficiary was steel, which grew at 13.5% in July 2023. Among other core sectors that showed impressive growth were natural gas at 8.9%, cement at 7.1% and electricity generation at 6.9%.

Several other sectors in the core sector grew at a more stable 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 3.3% as the typical monsoons demand has been waning with the conclusion of the sowing season for the Kharif crop. Even refinery output grew at just 3.6% and that can be attributed to the relatively tepid gross refining margins (GRMs) for these oil refining companies.

High frequency core sector growth for July 2023

Till this point, our focus has been on yoy growth in core sector overall and the core sector components. However, the yoy growth glosses over an important aspect. It does not capture the short term vicissitudes in these data points. That is why we look at high frequency data in the form of MOM (month-on-month) growth in the core sector components. The table below additionally looks at the high frequency MOM data also, to get a short term picture of the core sector performance. The YOY growth is extremely vulnerable to the base effect. Here we look at high frequency data as captured by month-on-month (MOM) core sector growth in the shaded column.

Core Sector Component	Weight	Jul-23 (YOY) %	Jul-23 (MOM) %	FY24 Cumulative (%) *
Coal	10.3335	+14.9%	-6.1%	+10.1%
Crude Oil	8.9833	+2.1%	+3.2%	-1.0%
Natural Gas	6.8768	+8.9%	+7.7%	+2.3%
Refinery Products	28.0376	+3.6%	-1.4%	+2.3%
Fertilizers	2.6276	+3.3%	+0.7%	+9.1%
Steel	17.9166	+13.5%	-0.9%	+15.3%
Cement	5.3720	+7.1%	-14.7%	+11.2%
Electricity	19.8530	+6.9%	-1.6%	+2.7%
Core Sector Growth	100.0000	+8.0%	-2.2%	+6.4%

Data Source: DPIIT (* FY24 is 4-months data)

The high frequency data had turned slightly negative in the month of June 2023 and that trend got perpetuated in July 2023. From -0.9% in June, the MOM core sector growth worsened to -2.2% in July 2023. It may not still be a source of concern, because the MOM data can be generally cyclical in nature. However, the big contributors to core sector growth like coal, cement, electricity, and steel have turned negative in July 2023. These infrastructure sectors have strong externalities and hence there could be long term pressure on other growth dimensions. However, most of the hydrocarbon related core sector components have shown positive MOM growth, which is the good news.

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 while for FY24, the data is the annualized effect of 4 months of core sector data from April to July 2023. 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)	7.8	14.8	-1.7	1.6	4.8	11.3	9.3	8.7	8.9
2023-24(Apr-Jul)	6.4	10.1	-1.0	2.3	2.3	9.1	15.3	11.2	2.7

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? If you leave out the 10.4% growth in core sector in FY22 (largely due to negative base effect), the FY23 core sector growth and the FY24 core sector growth are very impressive and also the best in last decade. The full year core sector growth stood at 7.8% in FY23 and at 6.4% in FY24, so far. However, remember that these are growth numbers on a very elevated base, which is all the more appreciable. 

There is one more point we need to understand here. From the pre-COVID levels of infrastructure output, the overall output is 18-20% higher and this is after the negative impact we had at the peak of the pandemic shutdown. That means; post pandemic, Indian core sector has bettered the pre-COVID average growth rate and that largely emanates from the infrastructure thrust given by the incumbent government at the centre. The government has consistently prioritized capex over revenue spending and that has been one of the biggest talking points for infrastructure growth in India.

Over the last 11 years, the average core sector growth has been 3.6%, so at 6.2% cumulative growth in FY24, the core sector is a good 260 bps better than the average. What is more gratifying is that this is despite the disruption caused by COVID and despite the global slowdown and the headwinds at a domestic and international level. In terms of capital spending and infrastructure spending, the previous decade was almost like the lost decade. Now the capital investment cycle is coming back into action as is evident from the overflowing order book positions of capital goods and infrastructure companies. That is the subtle story that is being reflected amply in the core sector numbers. That is the good news for markets; and of course, the Indian economy overall.