July core sector tapers to 4.5% amidst supply chain challenges

1 Sept 2022 , 12:14 PM

Now the base is fairly high, so even a 4.5% growth in core sector is appreciable. This time around, the base was 9.9% and the COVID effect is reducing. Hence, the 4.5% growth is a significant and meaningful growth over the COVID lows. However, as the sequential core sector growth over June 2022 shows, there is pressure in July due to a plethora of headwinds like the fear of a recession, tepid investment scenario, higher cost of funds and input inflation.

A good barometer of how future data will pan out is revisions to previous core sector numbers. The first revision in core sector growth for June 2022 marked a 50 bps upgrade from 12.7% to 13.2%. But there is still better news in the offing. The final revision for April 2022 resulted in core sector growth being upped by 110 bps from 8.4% to 9.5%. One way to understand the pre-COVID impact is to look at July 2022 core sector growth over July 2020. Over a 2 year period, the core sector is 14% above the July 2020 levels. Clearly, the base edge is waning and infrastructure growth is now coming on pure merit.

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

The core sector or infrastructure sector number has larger ramifications for the index of industrial production (IIP) and the GDP growth. Core sector has 40.27% weightage in the IIP basket. Apart from the IIP impact, the infrastructure sector also has strong externalities. For example, the growth in cement and steel, have a multiplier effect on overall GDP growth. In a sense, the core sector on a cumulative basis for FY23 has remained robust at 11.5% despite the global and domestic headwinds.

A quick look at the 8 core infrastructure sectors in July 2022

In July 2022, 6 out of the 8 core sectors were in the green with crude oil extraction and natural gas showing negative growth on a yoy basis. Let us begin with the segments that showed core sector surge. Coal production continued to lead the way with 11.4% growth yoy as heavy power demand and surge in captive mining helped output. Refinery products and fertilizers followed with 6.2% growth as record GRMs helped refining while supportive subsidies gave a boost to fertilizers. Steel grew 5.7% on a yoy basis as the gradual removal of export duties gave a boost to steel output. The growth in cement and electricity for the month of July 2022 was relatively subdued at over 2.1% and 2.2% respectively.

Crude oil extraction and natural gas saw lower output in July due to supply chain bottlenecks. In both the cases, the prices were also relatively subdued in the international markets. The positive 4.5% core sector growth can be attributed to strong growth in refinery products, coal and steel, which have a combined weightage of 56.3%. The overall core sector growth was negatively impacted by the tepid growth in electricity generation, which has a weight of 19.85% in the core sector basket.

High frequency core sector again disappointed in July 2022

Here we look at the break-up of the core sector based on YOY indicators and high-frequency growth. We also look at the FY23 cumulative numbers. Although it is just 4 months, it is still a fair reflection of the longer term trend.

Core Sector Component	Weight	Jul-22 (YOY) %	Jul-22 (MOM) %	FY23 Cumulative (%) *
Coal	10.3335	+11.4%	-10.3%	+26.6%
Crude Oil	8.9833	-3.8%	+0.5%	-0.5%
Natural Gas	6.8768	-0.3%	+2.4%	+3.5%
Refinery Products	28.0376	+6.2%	-0.4%	+11.7%
Fertilizers	2.6276	+6.2%	+0.9%	+11.3%
Steel	17.9166	+5.7%	+3.4%	+6.5%
Cement	5.3720	+2.1%	-11.3%	+13.3%
Electricity	19.8530	+2.2%	-4.2%	+13.1%
Core Sector Growth	100.0000	+4.5%	-2.3%	+11.5%

Data Source: DPIIT (* FY23 is Apr-Jul)

The critical data point to watch out is the fourth column of MOM growth (shaded column), which represents high frequency growth for July over June. The YOY figure is influenced by the base effect, but the high frequency growth captures short term triggers better. On MOM basis, the core sector growth was negative but that is just part of the story. Four out of the 8 core sectors showed negative high frequency momentum.

a)      The first data column is the weightage column which tells you how much impact a change in a particular component can have on the overall core sector growth. Refinery products, electricity, Coal and steel have a high combined weight of over 75%.

b)      The second column is  the break-up of yoy core sector growth of 4.5% for July 2022. Here, 6 out of the 8 core sectors are in the positive, with crude oil and natural gas contracting. Positive thrust came from coal, refining and steel, but weak growth in electricity pulled the overall core sector basket lower.

c)      The third column captures high-frequency MOM growth, which is negative in July also. Scratch the surface and the July 2022 situation is not as bad as June. In July, 4 out of the 8 core sectors have shown positive growth on MOM basis, including crude oil and natural gas.

However, the negative impact of electricity and coal on MOM basis has been quite intense and that resulted in negative overall HF contraction of -2.3%.

Core sector story over the last decade

Here is a time-series pack of annual core sector growth over last 10 years.

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	2021-22	2022-23 (4 mths)
Core Sector Growth (%)	-6.4%	10.4%	11.5%

Data Source: DPIIT

We have 4-months data for FY23 so the picture is just about building up. The full year data for FY22 was impressive at +10.4%, while the first four months of FY23 has been impressive at +11.5%. The real challenge going ahead would be handling the lag effect of supply chain bottlenecks, high inflation, uncertain oil supply and an ultra-hawkish monetary policy. Risk of a global slowdown remains a major overhang in the coming months.

Most of the infrastructure sectors in the core basket have strong externalities with sectors like steel and cement having a strong influence on GDP. Similarly, coal and electricity have a very strong influence on IIP. The immediate concerns for the next few months would be the weak rupee (at around 80/$) and the consequent imported inflation. One thing that is evident from the high frequency data is that there is short term pressure on the core sector numbers. The global macroeconomic state of flux is not going away in a hurry. High frequency growth in the core sector may remain under sustained pressure.