Sep-21 core sector expands 4.4% as base effect dividends evaporate

If the base effect had substantially petered out in Aug-21, then the base effect was almost fully negated in Sep-21. That is why the Sep-21 core sector growth of 4.4% looks a lot more tepid. However, it needs to be remembered that this is genuine growth with little base effect support.

Nov 02, 2021 08:11 IST India Infoline News Service

If the base effect had substantially petered out in Aug-21, then the base effect was almost fully negated in Sep-21. That is why the Sep-21 core sector growth of 4.4% looks a lot more tepid. However, it needs to be remembered that this is genuine growth with little base effect support.

The final revision raised the Jun-21 core sector growth marginally from 9.3% to 9.4%. At the same time, the first revision for the month of Aug-21 slightly lowered the core sector growth from 11.6% to 11.5%. But the good news is on the 2 year growth front. If you consider the core sector number for Sep-21 and compare with Sep-19, then the core sector is actually up 5.03% indicating that the COVID is finally being negated.

Jul-21 was the first month when core sector was above Jul-19 levels and Aug-21 numbers built on that advantage. That trend has continued in September too. The core sector has tremendous significance as it comprises 40.27% of the IIP basket and has significant impact on GDP growth. In Sept-21, 7 out of the 8 core sectors showed positive growth; with only crude oil showing yoy decline.

First Half core sector marginally below pre-COVID 2019 H1 levels

Core sector growth on a yoy basis is a lot more reflective now due to the evaporating base effect. But we still need to understand if the pain of COVID has been overcome in the first six months of the fiscal year.

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

The cumulative growth for Apr-Sep 2021 period is pegged at +16.6%. This is against -14.5% contraction in the Apr-Sep 2020 period, which was the COVID peak. That means, on a pre-COVID basis, core sector is still -0.31% below corresponding 2019 levels.

How the 8 core sectors fared; yoy and sequentially

In terms of Aug-21 core sector growth, 2 diverse trends are visible. The yoy core sector is up 4.4% but sequential core sector is sharply down by -5.02% as shown in the table below.

Core Sector Component YOY over Sep-20 (%) MOM over Aug-21 (%) Apr-Sep YOY(%)
Coal +8.1% -3.6% +11.7%
Crude Oil -1.7% -3.02% -2.9%
Natural Gas +27.5% -0.54% +22.1%
Refinery Products +6.0% -2.4% +11.2%
Fertilizers +0.02% -2.9% -1.3%
Steel +3.0% -1.4% +35.0%
Cement +10.8% -5.6% +37.7%
Electricity +10.3% -11.6% +12.7%
Overall Core Sector Growth +4.4% -5.02% +16.6%
Data Source: DPIIT

There are 3 columns in the above table and each column has a separate significance and interpretation.

a) The first column shows the break-up of yoy core sector growth of +4.4%. Here, 7 out of 8 core sectors are in the positive, except crude oil. Crude is showing negative trends on a yoy basis as oil production continues to be under strain with existing wells under strain.

b) The second column is one of the most important columns as the month-on-month growth measures momentum. If there was loss of momentum in August, it is only sharper in September. Firstly, the festive demand enthusiasm has not sustained. Secondly, supply chain constraints and steep input costs are taking their toll.

c) The third column covers cumulative data for the first six months of the current fiscal year and while that has grown on yoy, it is still short of the cumulative core sector output levels in 2019. Clearly, the impact of COVID on core sector output has been deeper and more structural than originally envisaged.

d) Summing the 3 columns up, the good news is there is traction in growth despite the base effect evaporating. However, the Indian economy is facing more practical problems like coal shortage, power outages, spike in input costs, global commodity inflation etc. All these factors have not allowed momentum to build up.

Second half of FY22 holds the key to bottom-up growth

Core sector is 40.27% weightage of IIP and needs to provide the much-needed impetus if IIP  and GDP have to pick up. The entire challenge is due to the 2 years lost in between in terms of core sector growth.

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-Sep FY22
Core Sector Growth (%) -6.4% 16.6%
Data Source: DPIIT

The first 6 months of FY22 does look impressive at 16.6%, but that is largely base effect and that effect is gradually waning. The remaining six months will have to generate genuine growth with little scope for base effect. The irony is that the core sector for FY22 has to grow by at least 7.5% to 8% to bring the core sector output back to Apr-2019 levels.

That would still mean 3 years of zero growth. Remember, the assumption of 7.5% to 8% growth in FY22 means that the core sector will have to grow at twice the median rate of the last 10 years. That looks easier said than done!

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