Dec-21 core sector expands 3.82% on cement and natural gas boost

1 Feb 2022 , 08:35 AM

If you look at the core sector chart over last 13 months, growth has been positive in 12 out of these 13 months. The core sector growth between Mar-21 and Aug-21 may be slightly misleading as growth was magnified due to a low base. Post Sep-21, that base effect has got neutralized, so core sector growth is at more sustainable levels now.

Meanwhile, final revisions in core sector growth for Sep-21 marked a smart 100 bps upgrade from 4.4% to 5.4%. The first revision for Nov-21 raised core sector growth from 3.1% to 3.4%. If you consider core sector numbers for Dec-21 and compare with Dec-19, then core sector is up 4.24% indicating that core sector is now growing above pre-COVID levels.

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

Core or infrastructure sector is a very critical lead indicator for IIP and GDP growth. That is because core sector has a weightage of 40.27% in IIP growth. If you look at a 2-year comparison of 2021 over 2019, Jul-21 was the first month when core sector was above Jul-19 levels and Aug-21 numbers built on that. In Sep-21, the 2-year growth was above 5% and in Oct-21, it was closer to 7%. However, in November, core sector growth tapered to 1.97% on a 2-year basis. In Dec-21, the growth over Dec-19 levels stands at a healthy 4.24% indicating that there is now sustainable growth traction above 2019 levels. However, the hope is that the combination of global hawkishness and inflation don’t spoil the party.

FY22 core sector 157 bps higher than FY20 levels

Core sector growth on a monthly basis is a good high-frequency barometer of evaporating base effect. It surely adds value as a momentum indicator. However, we need to understand if the pain of COVID has been overcome on a cumulative basis. For that the data of the first 9 months of FY22 can be compared to the first 9 months of FY20.

The cumulative growth for Apr-Dec 2021 period is pegged at +12.6%. This is against -9.8% contraction in the Apr-Dec 2020 period, which was the COVID peak. Thus, on a pre-COVID basis, core sector is now 1.57% above corresponding 2019 levels; representing a 49 bps improvement over the cumulative number last month.

Story of 8 core sectors; yoy and sequentially

Here we look at the break-up of the core sector based on YOY indicators, pre-COVID growth and high-frequency growth.

Core Sector Component	Weight	YOY over Dec-20 (%)	MOM over Nov-21 (%)	Apr-Dec YOY(%)
Coal	10.3335	+5.2%	+10.1%	+10.6%
Crude Oil	8.9833	-1.8%	+3.3%	-2.6%
Natural Gas	6.8768	+19.5%	+0.7%	+22.4%
Refinery Products	28.0376	+5.9%	+1.9%	+10.0%
Fertilizers	2.6276	+3.5%	-0.2%	-0.1%
Steel	17.9166	-1.0%	+6.8%	+22.1%
Cement	5.3720	+12.9%	+31.0%	+26.1%
Electricity	19.8530	+2.50%	+9.5%	+9.4%
Overall Core Sector Growth	100.0000	+3.8%	+7.1%	+12.6%

Data Source: DPIIT

Here are important takeaways from the table above.

a) The first column is the weightage column which tells you how much a change in particular component can have on the overall core sector number. Refinery products, electricity and steel have a high combined weight of over 65%.

b) The second column is  the break-up of yoy core sector growth of 3.8%. Here, 6 out of 8 core sectors are in the positive. Steel remains weak due to weak demand from auto sector. Natural gas has been the big gainer on favourable pricing, boosting output.

c) The third column captures high-frequency MOM growth. There has been a sharp turnaround in this segment. In Nov-21, 6 out of 8 components of core sector were in the negative while in December 6 out of 8 are in the positive, indicating that the likely impact of Omicron may have been blown out of proportions and this is a reality check.

d) The last column covers cumulative data for the first 9 months of FY22. Last month, cumulative data was 108 basis points above the corresponding FY20 levels. This month, that 2-year growth has improved to 157 basis points.

e) There are two positive inferences. Firstly, the long term secular trend is turning positive. Secondly, the short term impact of the Omicron variant seen in the previous month, has been more or less neutralized in December.

Where does core sector growth go from here?

Core sector has a 40.27% weightage in IIP and needs to provide the much-needed impetus if IIP  and GDP have to pick up.

Year	2012-13	2013-14	2014-15	2015-16
Core Sector Growth (%)	3.8%	2.6%	4.9%	3.0%
Year	2016-17	2017-18	2018-19	2019-20
Core Sector Growth (%)	4.8%	4.3%	4.4%	0.4%
Year	2020-21	Apr-Dec FY22
Core Sector Growth (%)	-6.4%	12.6%

Data Source: DPIIT

The first 9 months of FY22 look impressive at +12.6%, but that is likely to gradually wane by Mar-22 as the base effect also wanes. In the remaining 3 months of FY22, core sector must grow over 6-7% to bring the core sector output back to Apr-2019 levels. That would still mean that core sector would just be back to where it was 3 years back.

For now it looks like the Omicron scare has been managed reasonably well. The bigger risk now is to handle the risks arising from a rise in inflation, Fed hawkishness and any populist signals from the Union Budget.