Scratch the surface, and core sector is getting better
As previous core sector estimates see a slew of upgrades, it looks like estimates have been largely conservative. Core sector is still struggling to get back to above pre-COVID levels. However, in the last five months between Sep-20 and Jan-21, the lowest the core sector has gone is -1.4% and 3 out of these 5 months saw positive growth.
One thing is fairly evident from the chart. The cluster of core sector strain between March and August is history. The challenge now is recovery back to pre-COVID levels. After all, core sector has larger ramifications as it comprises 40.27% of the IIP basket and it is also a high-frequency lead indicator of IIP and GDP growth.
Positive GDP growth is a morale booster for core sector
For the Dec-20 quarter, the second advance estimates of GDP came in at 0.4%, which is gratifying after 2 consecutive quarters of COVID-led GDP contraction. While agriculture and manufacturing showed positive growth, the real boost comes from positive turnaround in services like construction, realty and financial services.
The number of positive drivers in the core sector has been consistent at around 3-4 in the last few months and even in Jan-21, 3 core sectors have given positive growth. Electricity, Fertilizers and Steel are growing, while oil gives hope.
The positive tidings continue from hydrocarbons, which account for 45% of the basket. Oil growth is still negative but it is getting closer to pre-COVID levels. Cement continues to disappoint on tepid housing demand, but positive turnaround in construction augurs well for cement output.
How the Eight core sectors added up in Jan-21
- Coal Sector (weight 10.33%) output saw -1.8% decline in Jan-21. Growth in coal output had been tapering in last few months and this can be attributed to the base effect. Coal sector growth is essential for power sector robustness.
- Electricity generation (weight 19.85%) increased by +5.1% in Jan-21. While it is related to coal, there is also a renewable component. Offices are functioning at full capacity, so electricity demand is back to pre-COVID levels.
- Fertilizers (weight 2.63%); grew by +2.7% in Jan-21. This segment tends to be cyclical as its output varies with seasonal Kharif and Rabi. This number indicates that, like the Kharif, the Rabi season has also been robust this year.
- Cement (weight 5.37%) output fell by -5.9% in Jan-21. There are big expectations from infrastructure sector with little contribution from home or office sales. With more capacity going onstream, this situation could change for the better.
- Steel (weight 17.92%) saw +2.6% growth in Jan-21. Steel companies have had a solid run and the combination of robust domestic and export demand is reflected in the numbers. Positive steel growth is always a good lead indicator.
- Crude Oil (weight 8.98%) extraction fell -4.6% in Jan-21. The crude output is gradually getting back to pre-COVID levels but India still needs new oil finds to be able to push production up substantively.
- Natural Gas (weight 6.88%) production fell -2.0% and is now looking a lot more encouraging. While pricing is still an issue, the Reliance KG-D6 gas coming into the market and permission to sell gas to subsidiaries has given a boost to gas output.
- Refinery Products (weight 28.04%) fell -2.6% and is one component that has been consistently improving. While GRMs remain low, the higher crude prices give refiners an advantage in translation of inventories. Crude prices could hold the key.
Core sector needs to drive GDP growth
Core sector has a 40.27% weight in manufacturing IIP and it has a direct as well as downstream impact on GDP growth. Clearly, a lot of the onus to drive GDP will be on the core sector due to its strong externalities.
|Core Sector Growth (%)||3.8%||2.6%||4.9%||3.0%|
|Core Sector Growth (%)||4.8%||4.3%||4.4%||0.4%|
|Core Sector Growth (%)||-8.8%|
The core sector contraction in the first 10 months of FY21 stands at -8.8% and this has to meaningfully improve to around -6.5% levels, if the RBI GDP contraction target of -7.5% has to be achieved. Budget 2021 was more than aggressive on fiscal deficit targets and infrastructure spending. The ball is now in the court of the core sector for the next phase of GDP growth.