June core sector up 12.7% boosted by coal, cement and refining

1 Aug 2022 , 08:54 AM

The core sector growth at 12.7% for June 2022 is lower than the core sector growth achieved in May. However, now the base is fairly high, so even a 12.7% growth in core sector is appreciable. This time around, the base was 9.4% and the COVID effect is reducing, so the 12.7% growth is laudable on a zero base. However, as the sequential core sector growth over May shows, there is pressure in June due to a combination of factors like a 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 the revisions in core sector numbers. The first revision in core sector growth for May 2022 marked a 120 bps upgrade from 18.2% to 19.3%. However, the final review of March 2022 core sector resulted in the growth tapering by 10 bps lower from 4.9% to 4.8%. One way to understand the pre-COVID impact is to look at June 2022 core sector growth over June 2020 growth. Over a 2 year period, the core sector for June 2022 is 23.3% above the June 2020 levels. While weak COVID base did play a role, that impact 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, it must be remembered that the infrastructure sector also has strong externalities. For example, the growth in cement and steel, tends to have a multiplier effect on overall GDP growth. These are not the most conducive times for growth and even amidst this uncertainty, the core sector has maintained 12.7% in June 2022.

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

In June 2022, 7 out of the 8 core sectors were in the green with only crude oil extraction showing negative growth on a yoy basis. Let us begin with the surging infrastructure units. Coal production continued to lead the way with 31.1% growth yoy as heavy power demand and surge in captive mining helped output. Cement output followed with 19.4% growth as construction activity continued in June due to delayed monsoons. Electricity grew 15.5% on a yoy basis while refinery products grew 15.1% in June 2022 amidst record gross refining margins, with the Singapore GRM benchmark well above $20/bbl.

Among the other key growth sectors, fertilizers grew 8.2% on favourable pricing and liberal fertilizer subsidies given to farmers by the government. The growth in steel and natural gas were relatively tepid at 3.3% and 1.2% respectively. The only sector to witness de-growth on a yoy basis was crude oil extraction, where the issues are a lot more systemic with the marginal output from existing wells consistently reducing.

The 12.7% overall core sector growth can be attributed to strong growth from some of the high weightage sectors like refinery products, electricity generation and coal production. These 3 segments account for close to 60% of the total weightage of the core sector and robust growth in all these segments was a key driver in the month of June 2022.

High frequency core sector growth disappointed in June 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 this is just 3 months, but a quarter is a good starting point.

Core Sector Component	Weight	Jun-22 (YOY) %	Jun-22 (MOM) %	FY23 Cumulative (%) *
Coal	10.3335	+31.1%	-6.1%	+31.2%
Crude Oil	8.9833	-1.7%	-4.4%	+0.6%
Natural Gas	6.8768	+1.2%	-3.5%	+4.8%
Refinery Products	28.0376	+15.1%	-5.1%	+13.5%
Fertilizers	2.6276	+8.2%	+0.3%	+13.2%
Steel	17.9166	+3.3%	-7.7%	+6.6%
Cement	5.3720	+19.4%	+6.9%	+17.1%
Electricity	19.8530	+15.5%	-2.3%	+16.8%
Core Sector Growth	100.0000	+12.7%	-4.1%	+13.7%

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

The big data point to watch out is the fourth column of MOM growth (shaded column), which represents high frequency growth over previous month index. The YOY figure can be influenced by the base effect, but the high frequency growth captures short term drivers better. On MOM basis, the core sector growth was negative with unfavourable short term momentum. Six 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 and steel have a high combined weight of over 65%.

b)      The second column is  the break-up of yoy core sector growth of 12.7%. Here, 7 out of the 8 core sectors are in the positive, with only crude oil contracting. Big positive thrust has come from refinery products, electricity generation, coal and cement.

c)      The third column captures high-frequency MOM growth. This is in stark contrast to May 2022, when 7 out of 8 core sectors recorded positive growth MOM. However, in June the situation reversed with 6 out of the 8 core sectors showing negative growth. Apart from Cement and Fertilizers, other showed negative momentum. This can be attributed to factors like supply chain constraints, central bank hawkishness relentless inflation and fears of recession.

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 (3 mths)
Core Sector Growth (%)	-6.4%	10.4%	13.7%

Data Source: DPIIT

We have 3-months data for FY23 so the image is still building up. The full year data for FY22 was impressive at +10.4%, while the first quarter of FY23 has been impressive at +13.7%. The big challenge going ahead would be handling the lag effect of supply chain bottlenecks, high inflation and an ultra-hawkish monetary policy.

Most of the infrastructure sectors in the core numbers have strong externalities. The immediate concerns for the future months would be the weak rupee (near 80/$) and the consequent imported inflation. The high frequency data shows clear short term pressure due to the fluid global macro situation. That is not going away in a hurry!