Core sector growth for October 2023 bounces back to 12.07%

30 Nov 2023 , 09:00 PM

Core sector bounces back to robust 12.07% in October 2023

On the last working day of November 2023, the Office of the Economic Advisor published the core sector growth for the month of October 2023 and the cumulative core sector growth figures for the first seven months of fiscal year FY24. This is the fifth month in a row that the core sector growth has been above 8%, which shows a lot of traction from the infrastructure sector. However, what is gratifying is that after the dip in September, the core sector is back to double digits in October. After 8.37% core sector growth in June 2023 and 8.55% in July 2023, the core sector figure got a big boost to 12.55% in August 2023. September growth remained robust at 9.20%, albeit lower. In October, the core sector has bounced back to 12.07%, largely led by power, coal, steel, and cement. 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 it to the low-base effect. October 2023 core sector growth is on a base of 0.73% in October 2022; so, the base effect surely did contribute something to the surge. Core sector is a barometer of infrastructure growth in India, and combines 8 basic building blocks of the economy. It is typically reported with a lag of one month; which means the October data gets reported on the last day of November. 

How government capex is driving core sector growth 

Just to give a brief background, the government has been heavily spending on infrastructure capex in the last couple of years and the results are visible in the form of higher core sector growth. In fact, the government has even focused on capex and infrastructure sector at the cost of revenue spending in the last 2 budgets. 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. Core sector 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. For October 2023, the growth traction was led by Electricity, Coal, Cement, and Steel. What must also be mentioned here is that all the 8 core sectors witnessed positive growth in October 2023 with crude oil also growing by 1.31%. There were four core sectors growing in double digits, with natural gas almost there.

How core sector revisions played out in October 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. The September 2023 core sector growth had fallen compared to August but we have now seen a revival in October. The month of October 2023 core sector output marks the fifth month in a row when the core sector growth has been above 8% and in 2 of these 5 months, the core sector growth has been in double digits. Let us quickly look at revisions to the core sector growth. The first revision for September 2023 upgraded the core sector growth by 107 basis points from 8.13% to 9.20%. At the same time, the final revision for July 2023 core sector output also upgraded growth by 15 bps from 8.40% to 8.55%. Revisions are decisively positive and bode well for October 2023 numbers.

Months	Overall (%)	Coal (%)	Crude Oil (%)	Natural Gas (%)	Refinery (%)	Fertilizers   (%)	Steel  (%)	Cement (%)	Electricity   (%)
Oct-22	0.73	3.80	-2.20	-4.24	-3.10	5.42	5.76	-4.16	1.19
Nov-22	5.70	12.26	-1.08	-0.68	-9.30	6.37	11.52	29.13	12.71
Dec-22	8.28	12.29	-1.16	2.60	3.69	7.25	12.34	9.51	10.39
Jan-23	9.67	13.61	-1.06	5.22	4.54	17.91	14.35	4.70	12.66
Feb-23	7.38	8.97	-4.90	3.13	3.32	22.23	12.35	7.42	8.15
Mar-23	4.24	11.67	-2.85	2.67	1.54	9.72	12.09	-0.20	-1.57
Apr-23	4.57	9.14	-3.55	-2.86	-1.50	23.54	16.56	12.36	-1.12
May-23	5.23	7.23	-1.94	-0.33	2.78	9.71	11.96	15.92	0.83
Jun-23	8.37	9.76	-0.56	3.48	4.58	3.44	21.31	9.95	4.22
Jul-23	8.55	14.95	2.06	8.92	3.56	3.29	14.92	6.89	7.95
Aug-23	12.55	17.89	2.15	9.95	9.49	1.79	12.44	19.32	15.31
Sep-23	9.20	16.03	-0.36	6.57	5.55	4.21	13.76	4.62	9.87
Oct-23	12.07	18.41	1.31	9.93	4.24	5.35	11.04	17.08	20.27

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

The table above provides the core sector growth trend for a period of 13 months between October 2022 and October 2023. The upward momentum on an average, has been sustained since March 2023. During the period, the core sector had gradually moved up from 4.24% to 12.55% in August 2023 before normalizing to 9.20% in September 2023, but bouncing back to 12.07% in October 2023. Out of the 8 core sectors, all 8 sectors showed positive growth traction in October 2023 on a yoy basis; with four of the core sectors in double digits and natural gas growing at an attractive 9.93%. While the 12.55% growth in August did look like an exceptional spike, the October bounce shows that double digit core sector may be a direct corollary of the government capex spending and could sustain at a new normal. 

October 2023 – How sectors defined the core sector narrative

The two connected sectors that have driven core sector growth are coal and electricity. For October 2023, coal output grew at 18.41% while electricity generation grew at 20.27%. The boost to power output amidst record power demand has led to robust demand for coal; since thermal power still remains the mainstay of power generation in India. The government not only opened the floodgates to coal imports, where necessary, but has also pushed for maximization of domestic coal output. Cement grew at an impressive 17.08% and steel at 11.04% as the post monsoon demand from the construction and infrastructure space continues to be robust and building activity is also picking up on the residential front.

Even other key sectors like oil refining (which has the highest weightage) and natural gas production grew at 4.24% and 9.93% respectively. It looks like a more friendly gas policy and higher gross refining margins are chipping in. Among other sectors, fertilizers managed to grow over 5% while even crude oil saw growth of 1.31%. 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 what is driving the record rally in the core sector.

High frequency core sector growth for October 2023

Till this point, our discussions have focused around yoy growth in the core sector output. However, yoy growth has limitations. For instance, 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 core sector components comes in handy. The shaded column in the table below represents high frequency MOM data; which provides a short term picture of the core sector performance. The MOM growth is less vulnerable to the base effect compared to the YOY growth and that is why the shaded column is significant.

Core Sector Component	Weight	Sep-23 (YOY) %	Sep-23 (MOM) %	FY24 Cumulative (%) *
Coal	10.3335	+18.41%	16.67%	+13.11%
Crude Oil	8.9833	+1.31%	+4.68%	-0.11%
Natural Gas	6.8768	+9.93%	+4.53%	+5.12%
Refinery Products	28.0376	+4.24%	+4.55%	+4.01%
Fertilizers	2.6276	+5.35%	+3.11%	+6.72%
Steel	17.9166	+11.04%	+0.13%	+14.46%
Cement	5.3720	+17.08%	+9.44%	+12.25%
Electricity	19.8530	+20.27%	-1.08%	+7.90%
Core Sector Growth	100.0000	+12.07%	+2.78%	+8.59%

Data Source: DPIIT (* FY24 is 6-months data)

A quick recap of the recent trend in MOM data. The high frequency data had seen negative impact of -4.80% in the month of September and in comparison, the October growth on MOM basis is much better. Clearly, the short term trends are positive in October and that is evident from the +2.78% positive core sector growth in October 2023 on a MOM basis. In comparison to the previous month, the growth impulses in October are far stronger as was evident from the way the core sector output bounced back on yoy basis. There are two things to bear in mind here. If you take the 8 sectors in the core sector basket in October 2023, 7 out of the 8 core sectors have shown positive growth, which is in contrast to the trend in September, when all the eight core sector witnessed negative traction in terms of high frequency growth. This is a positive indicator of future core sector growth traction.

Charting core sector growth – The 10-year story

Here is how core sector growth has panned out over last decade. From FY13 to FY23, we have pinned full year data. For FY24 data here is 7 months data from April to October 2023 and it would give a reasonably clear picture of how the full fiscal year FY24 is likely to pan out. We also added the comparable period of 7 months for the last two fiscal years of FY23 and FY22 and these comparisons have been shaded in grey. 

Months	Overall (%)	Coal (%)	Crude Oil (%)	Natural Gas (%)	Refinery (%)	Fertilizers   (%)	Steel  (%)	Cement (%)	Electricity   (%)
2012-13(Apr-Mar)	3.82	3.19	-0.60	-14.42	7.15	-3.32	7.92	7.46	4.00
2013-14(Apr-Mar)	2.56	0.95	-0.19	-12.92	1.39	1.47	7.32	3.74	6.05
2014-15(Apr-Mar)	4.94	8.05	-0.87	-5.33	0.17	1.30	5.11	5.91	14.81
2015-16(Apr-Mar)	2.98	4.83	-1.39	-4.72	4.88	7.02	-1.28	4.62	5.69
2016-17(Apr-Mar)	4.76	3.19	-2.53	-1.03	4.89	0.21	10.74	-1.23	5.84
2017-18(Apr-Mar)	4.28	2.57	-0.90	2.86	4.58	0.03	5.57	6.33	5.32
2018-19(Apr-Mar)	4.37	7.38	-4.15	0.82	3.13	0.34	5.09	13.31	5.16
2019-20(Apr-Mar)	0.36	-0.35	-5.95	-5.64	0.22	2.67	3.36	-0.88	0.94
2020-21(Apr-Mar)	-6.39	-1.87	-5.21	-8.17	-11.22	1.65	-8.66	-10.80	-0.49
2021-22(Apr-Mar)	10.41	8.55	-2.64	19.24	8.93	0.69	16.94	20.77	7.96
2022-23(Apr-Mar)	7.80	14.84	-1.72	1.60	4.82	11.31	9.26	8.70	8.89
2021-22(Apr-Oct)	15.57	12.17	-2.81	22.62	11.69	-1.05	30.80	33.60	11.34
2022-23(Apr-Oct)	8.40	18.10	-1.41	0.91	8.08	10.53	6.74	8.66	9.45
2023-24(Apr-Oct)	8.59	13.11	-0.14	5.12	4.01	6.72	14.46	12.25	7.90

Data Source: DPIIT (FY2023-24 data is for 7 months)

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

• FY24 growth in the first 7 months is quite impressive at 8.59%, and is building heft despite a higher base. This is slightly better than the comparable period for FY23 at 8.40%. The cumulative growth for FY24 may look lower than FY22, but that is more optical as FY22 growth came on the back of the pandemic lows.

   

• It is important to use the longer term annual data for a more secular view. From the pre-COVID levels, the infrastructure output is 20-22% higher and this is after the negative impact of the pandemic is factored in. That means; post pandemic, Indian core sector has bettered the pre-COVID average growth rate (by a margin) 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 around 4%, so at 8.59% cumulative growth in FY24, the core sector is a good 400 bps better than the average. This is despite serious headwinds at a domestic and international level.

In terms of capex and infrastructure spending, the previous decade was like a lost decade. That was the time when the winds were favouring the developed markets more than the emerging markets like India. The government has triggered a revival in the capital cycle and the private sector is taking over; and that is the good news.

However, there is one more quiet indication that we can decipher. The pace at which the core sector output is growing and order books are overflowing for capital goods, it is now very unlikely that the RBI would even consider the possibility of rate hikes and spoil the growth party. We now have to await the impact on output, and if the latest GDP growth at 7.6% in Q2FY24 is anything to go by, the accretive impact on growth is already visible.