September core sector bounces to 7.9% on government capex thrust

1 Nov 2022 , 04:55 PM

After a rather disappointing core sector growth of 3.3% in August 2022, the month of September 2022 saw a rebound in core sector growth to 7.9%. Incidentally, core sector growth had been consistently falling from 19.3% in May 2022 to 13.2% in June 2022 to 4.5% in July 2022 and 3.3% in August 2022. It is in this light that the rebound in core sector growth in September 2022 to 7.9% is laudable. While it is partly true that a lower base may have magnified the core sector growth in September, there is also the element of sustained government capital expenditure that has resulted in core sector traction.

A good barometer of how future data will pan out is the revisions to previous core sector numbers. The first revision in core sector growth for August 2022 has seen a positive revision by 80  basis points from 3.30% to 4.10%. However, the final revision for June 2022 resulted in core sector growth edging lower by 10 bps from 13.20% to 13.10%. Overall, the more recent upgrades in core sector growth are showing the direct impact of the government investing more into infrastructure and capex spending, with its concomitant salutary effects on the economy overall.

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

The core sector or infrastructure sector, has larger ramifications for the index of industrial production (IIP) and the GDP growth. That is because, the core sector has a weight of 40.27% in the IIP basket. Apart from the IIP impact, the infrastructure sector also has strong externalities with wider impact. For instance, growth in cement and steel, have a multiplier effect on overall GDP growth. The big signal this month comes from the government which has given a boost to the core sector growth with its active investments in infrastructure capex (capital expenditure). The core sector on a cumulative basis for FY23 has remained robust at 9.6% despite global and domestic headwinds. That is the good news to savour.

September 2022: How the 8 pillars of core sector performed?

In September 2022, 6 out of the 8 core sectors were in the green with crude oil extraction and natural gas once again showing negative growth on a yoy basis. Let us start with the segments that triggered the core sector growth. Thanks to the tireless efforts of Coal India and the thrust on captive coal mining; the coal sector output led the way with 12% yoy growth. Fertilizers was another star in the month of September, growing at 11.8%; almost at par with the previous month momentum. Among others; electricity grew by 11%, cement by 12.1%, steel by 6.7% and refinery products by 6.6%. The genuine turnaround in the cement and steel output during the month of September is a direct outcome of the government thrust on capex, that is having spill over effects on the output of core sectors.

Crude oil extraction and natural gas saw lower output in September 2022 due to pricing issues in gas (it was revised towards the end of September) and ageing wells for crude oil production. Not surprisingly, the government has been going all guns blazing giving out blocks for oil extraction at a rapid pace. Interestingly, in the case of natural gas, it is the domestic pricing policies that are taking a toll. The positive 7.9% core sector growth can be attributed to strong growth in refinery products, which has a 28.04%, electricity output with a weight of 19.85% and coal which has a weightage of 10.33%. Cement and steel also contributed handsomely to the overall core sector in the quarter as they were the direct beneficiaries of enhanced capex investments by the government.

High frequency core sector disappoints for fourth month in a row

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. As of now we have 6 months of data, which can be a fair reflection of the longer term trend.

Core Sector Component	Weight	Sep-22 (YOY) %	Sep-22 (MOM) %	FY23 Cumulative (%) *
Coal	10.3335	+12.0%	0.00%	+21.0%
Crude Oil	8.9833	-2.3%	-1.96%	-1.3%
Natural Gas	6.8768	-1.7%	-1.23%	+1.8%
Refinery Products	28.0376	+6.6%	-2.75%	+10.1%
Fertilizers	2.6276	+11.8%	-2.98%	+11.5%
Steel	17.9166	+6.7%	+1.00%	+6.4%
Cement	5.3720	+12.1%	+4.36%	+10.9%
Electricity	19.8530	+11.0%	-2.61%	+10.7%
Core Sector Growth	100.0000	+7.9%	-1.15%	+9.6%

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

The critical data point to watch out is the fourth column of MOM growth (shaded column), which represents high frequency growth for September over August. While the YOY figure is influenced by the base effect, the high frequency MOM growth captures short term headwinds and tailwinds a lot better. That is why it is considered a much better high frequency indicator. On MOM basis, core sector growth was negative for the fourth month in a row with just 5 out of 8 sectors showing negative momentum, 2 sectors showing positive momentum and coal output showing flat to neutral 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% and the overall core sector growth is most likely to gravitate these numbers.

b)      The second column is  the break-up of yoy core sector growth of 7.9% for September 2022. Here, 6 out of the 8 core sectors are once again in the positive, with crude oil and natural gas contracting on a yoy basis. Positive thrust came from refining, coal and electricity; but it was steel and cement that depicted the government capex spending driven momentum in the core sector numbers.

c)      The third column captures high-frequency MOM growth, which is in the negative for the fourth month in a row. In September 2022, only 2 out of the 8 core sectors have shown positive growth on MOM basis viz. steel and cement. That is where most of the momentum from government spending has come. While coal output was neutral MOM, the other five sectors saw contraction in core sector output on a high frequency basis.

How core sector has performed over last 10 years

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 (6 mths)
Core Sector Growth (%)	-6.4%	10.4%	9.6%

Data Source: DPIIT

We have 6-months data for FY23 so the picture is fairly representative. The full year data for FY22 was impressive at +10.4% but that was on a negative base, so we cannot attach too much credence to that number. However, FY23 growth is more genuine and while it has been losing short term momentum, the context is that the overall figure still remains robust amidst all the global macro headwinds. There are several major headwinds like recession fears, supply chain bottlenecks, high inflation and ultra-hawkish central banks.

The one area of concern is the weak rupee (at around 83/$) and the resultant imported inflation. High frequency data of last 4 months betrays a lot of short term pressure on the core sector numbers. However, the latest month data indicates that the government capex spending is having a salutary impact on core sector numbers. That is a positive takeaway!