August Core sector expands 11.6% but crude and fertilizers falter

The original core sector for Aug-21 was announced at 9.4% but the first revision has been upward to 9.9%.

Oct 02, 2021 10:10 IST India Infoline News Service

August 2021 was special as the base effect edge of low growth in 2020 almost petered out. From Sep-21, there will be zero base effect. However, despite limited base advantage, the core sector for Aug-21 has grown 11.6% compared to 9.9% in Jul-21. The original core sector for Aug-21 was announced at 9.4% but the first revision has been upward to 9.9%.

The final revision raised the May-21 core sector growth marginally from 6.3% to 6.4%. The second big signal of positive traction is that the core sector output for Aug-21 is 3.9% above Aug-19 levels. This is the second month that core sector has scaled above pre-COVID levels. However, base effect waned as growth is down from 62.6% in Apr-21 to 11.6% in Aug-21.

July was the first month when core sector was above Jul-19 levels and Aug-21 numbers have built on that advantage. The core sector has lot of significance as it accounts for 40.27% of the IIP basket and has significant impact on GDP growth. In August, only 6 out of 8 core sectors showed positive growth; with crude and fertilizers contracting you

Apr-Aug core sector still below pre-COVID levels

Core sector growth this year is on a low base so it is optically satiating but practically unreliable. An alternate method would be to compare the core sector growth of first 5 months of FY22 with that of the first 5 months of FY20.
Data Source: DPIIT (Department for Promotion of Industry and Internal Trade)

The cumulative growth for Apr-Aug 2021 period is pegged at +19.3%. This is against -17.3% contraction in the Apr-Aug 2020 period, which was the COVID peak. That means, on a pre-COVID basis, core sector is still -1.34% below corresponding 2019 levels.

Core sector growth for May and July were upgraded

Two months back, core sector growth for May-21 was downsized from 16.8% to 16.3%. In the final revision in August, core sector growth for May has been revised up from 16.3% to 16.4%. August core sector announcement also put out the first revisions of Jul-21 core sector data, where growth has been sharply revised up from 9.4% to 9.9%. This gives hope of positive growth traction in future months too.

In the last couple of months, 7 out of the 8 core sectors gave positive growth. However, in Aug-21, crude oil and fertilizers gave negative growth with the fertilizers contraction creating a procurement problem for farmers in the Rabi season.

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 11.6% but sequential core sector is slightly down by -0.9% as shown in the table below.
Core Sector Component YOY over Aug-20 (%) MOM over Jul-21 (%) Apr-Aug YOY(%)
Coal +20.6% -0.7% +12.5%
Crude Oil -2.3% -1.25% -3.2%
Natural Gas +20.6% +1.1% +21.0%
Refinery Products +9.1% -5.5% +12.3%
Fertilizers -3.1% -2.6% -1.5%
Steel +5.1% +2.0% +44.2%
Cement +36.3% -3.6% +44.3%
Electricity +15.36% +1.6% +15.2%
Overall Core Sector Growth +11.6% -0.9% +19.3%
Data Source: DPIIT

This is a comprehensive picture of core sector growth components for Aug-21 on a yoy basis (over Aug-20) as well as sequentially (over Jul-21). There are 2 important data points for policymakers. The Aug-21 yoy growth is slower than the trailing growth, indicative of the base effect tapering. Secondly, MOM numbers show loss of momentum over Jul-21

If you consider the 5-month (Apr-Aug 2021) period, core sector has grown by +19.3% yoy. However, it is still lower by -1.34% when compared to the corresponding 2019 levels. So, infrastructure output is still to scale pre-COVID levels. However, for Aug-21, the core sector output is +3.9% above the Aug-19 levels and that is a good signal. Supply chain constraints, raw material prices and microchip shortages are putting pressure on the MOM growth.

Next 7 months core sector numbers hold the key to India story

Core sector has 40.27% weightage in IIP. Hence, it has to provide the much-needed impetus if IIP in particular, and GDP in general, has to pick up. The whole 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-Jul FY22
Core Sector Growth (%) -6.4% 19.3%
Data Source: DPIIT

The first five months of FY22 does look impressive, but that is largely due to the base effect. It is still -1.34% below the first 5 months of FY20, so not yet back to pre-COVID levels. For FY22, if the core sector actually grows at about 7%, then India’s core sector will get back to the 2018-19 levels. That would still mean 2 years of lost growth in the India infrastructure story. The remaining 7 months of FY22, will be the most testing period for core sector data ever.

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