Aug-24 core sector growth dips into negative after 42 months

1 Oct 2024 , 09:38 AM

CORE SECTOR GROWTH DIPS TO -1.77% IN AUGUST 2024

It is not often that you find the core sector growth in the negative. In the month of August 2024, the core sector growth dipped into negative after a gap of 42 months. The last time we had seen negative core sector growth was in February 2021, when the core sector output had contracted by -3.3% due to the relapse of the COVID pandemic. That had led to widespread shutdowns in factories and businesses across India leading to negative core sector growth. However, if you exclude the several months of negative core sector growth during the COVID phase from 2019 to 2021, the last time that India had witnessed core sector contraction in normal times was way back in April 2015. It was certainly disappointing since July had seen robust core sector growth at 6.14%, while August saw core sector contraction at -1.77%.

The monthly core sector growth for August 2024 dipped sharply to -1.77%; the first monthly contraction in 42 months and, if you just consider the normal times, this is the first core sector contraction in over nine-and-half years. There have been some interesting revisions to the previous core sector data. The first revision of the July 2024 core sector upped the figure by 7 basis points from 6.07% to 6.14%. At the same time, the final revision of May 2024 core sector growth saw an upgrade of 54 basis points from 6.32% to 6.86%. In short, the revisions are still positive and bode well for the September core sector numbers. It remains to be seen if the negative core sector growth in August 2024 is just a one-off event or indicative of a trend. Recently, economists had concerns that with the government cutting down on capex growth from 30% to 11%; the core sector growth could be impacted.

CORE SECTOR LEADERS AND LAGGARDS IN AUGUST 2024

The core sector comprises of 8 infrastructure baskets and each of these baskets have a weightage; with refinery products having the highest weightage of 28.04%, followed by electricity at 19.85% and steel at 17.92%. In the month of August 2024, out of these 3 sectors, only steel gave positive growth while the other two gave negative growth. In fact, if you look at the core sector data for August 2024, only fertilizers and steel showed positive output growth with the other six sectors showing negative growth leading the overall headline core sector growth to contract by -1.77% for the month. Here it must be noted that the core sector basket has 40.27% weight in the IIP basket, so the core sector impacts IIP growth and GDP growth due to its secondary effects.

For August 2024, the contracting core sectors outnumbered the expanding core sectors by a ratio of 3:1. There were only 2 positive drives for core sector growth in August 2024; Steel at 4.54% and Fertilizers at 3.15%. Among the losing sectors were Coal at -8.05%, Electricity at -5.03%, Natural Gas at -3.61%, Crude oil output at -3.44%, Cement at -3.02%, and Refinery Products at -1.03%. The sectors with negative growth showing core sector contraction had a combined weight of nearly 80% in the overall core sector basket, so it is only apparent that the overall core sector growth also ended in the negative.

CORE SECTOR AVERAGES OVER LAST ONE YEAR

One way to get a proper perspective of the latest month core sector data is to look at the one year averages to see if the current figure is underperforming or outperforming the averages. The overall core sector growth in the last one year has averaged around 7.58% in the 12 months prior August 2024, which is quite positive. Among the major drivers were coal output at 12.01%, natural gas at 6.81%, steel output at 10.07%, cement at 5.82% and electricity generation at 9.57%. These were the big drivers in terms of the positive shift in core sector growth. Among the laggards, crude oil output at 0.62% and fertilizers at 1.21% proved to be a drag on core sector growth. The core sector with the highest weightage (Refinery Products), grew at a modest average of 3.77%.

BREAKING DOWN THE AUGUST 2024 CORE SECTOR GROWTH

The table below captures the breakdown of the -1.77% core sector contraction for August 2024 into the 8 components. Out of the 8 core sectors, 2 sectors (Fertilizers and Steel) reported positive core sector growth while the other 6 sectors reported negative core sector growth. While the gaining sectors averaged 3.84% growth in the core sector, the losing sector averaged -4.03% contraction over the last 12 months prior to August 2024. One must not forget that the base effect also played a role. The comparable base moved from 8.6% in July 2023 to 13.37% in August 2023, partly justifying the contraction in GDP. However, the government has to now quickly do a rethink on whether the slowdown in capex spending has impacted the core sector and whether it can revive from the initial shocks.

Months	Overall (%)	Coal (%)	Crude (%)	Natural Gas (%)	Refinery (%)	Fertilizers  (%)	Steel  (%)	Cement (%)	Electricity  (%)
Aug-23	13.37	17.88	2.22	10.00	9.55	1.83	16.36	19.74	15.26
Sep-23	9.45	16.00	-0.40	6.52	5.49	4.17	14.81	4.73	9.87
Oct-23	12.68	18.38	1.29	10.00	4.29	5.33	13.59	16.95	20.38
Nov-23	7.89	10.87	-0.40	7.52	12.36	3.33	9.74	-4.75	5.76
Dec-23	5.08	10.79	-1.02	6.71	4.09	5.85	8.28	3.84	1.23
Jan-24	4.16	10.57	0.64	5.45	-4.30	-0.59	9.17	4.06	5.68
Feb-24	7.06	11.57	7.93	11.19	2.63	-9.50	9.44	7.82	7.59
Mar-24	6.25	8.70	2.07	6.30	1.59	-1.27	7.53	10.58	8.62
Apr-24	6.94	7.51	1.73	8.56	3.92	-0.76	9.83	0.16	10.24
May-24	6.86	10.20	-1.14	7.51	0.50	-1.66	8.94	-0.63	13.74
Jun-24	5.13	14.78	-2.62	3.27	-1.54	2.45	6.72	1.90	8.58
Jul-24	6.14	6.82	-2.92	-1.27	6.62	5.31	6.42	5.48	7.94
Aug-24	-1.77	-8.05	-3.44	-3.61	-1.03	3.15	4.54	-3.02	-5.03

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

The table above provides the core sector growth trend for the 13 months from August 2023 to August 2024. The positive momentum that had been assiduously sustained since March 2023 appear to have been visibly disrupted in the latest month of August 2024 with the core sector growth contracting. It must be noted here that this is the first core sector contraction in the last 42 months. If you exclude the exceptional COVID period when there were several disruptions to infrastructure output; then the last time we have had core sector contraction in normal times was in April 2015. That is nearly 10 years back. However, upgrades like we saw for the May and July data is a positive signal. While the full year core sector growth stood at a robust level of 7.60% for FY24; the cumulative core sector growth for the first 5 months of FY25 has fallen to 4.2%, largely due to the August 2024 disruption. It was averaging a relatively healthy 6.11% till July 2024. The pressure of lower capex spending by the government appears to be manifesting in the form of pressure on core sector growth.

Out of the 8 core sectors in August 2024, only 2 sectors showed yoy positive growth traction while 6 sectors showed negative growth momentum. Let us look at the positive growth sectors first. Steel output expanded by 4.54% while fertilizers output contracted by 3.15% on a yoy basis in August 2024. Let us now to the sectors that contracted. Coal sector output contracted by -8.05%, while electricity output also contracted by -5.03%. Both are an outcome of the sudden fall in demand after the spike in the summer months. Among others; natural gas output contracted by -3.61%, crude oil production by -3.44% and cement output by -3.02%. A slowdown in capex appears to be the reason. Refinery products, which has the largest eight of 28.04% in the core sector basket; contracted by -1.03% due to maintenance work at most refineries, which is temporary in nature. The bottom line is that most of the sectors with a substantial weightage like refineries, electricity and coal saw negative growth, which pulled down the overall core sector growth for August 2024 into negative zone.

What is the outlook for core sector in the coming months? With the monsoons turning in at 107.6% of long period average (LPA), as per the IMD, Kharif output is likely to show good traction. That will result in a revival in rural demand, although higher rural inflation remains a big challenge. While the higher MSP will surely make a difference, the full picture of the monsoons output on agriculture will only be visible after we get to see the Rabi data also by the end of this year. To an extent, the full budget on July 23, disappointed by not expanding the capex growth from 11.1%, despite the comfort of a much higher RBI dividend of ₹2.11 Trillion for the fiscal year. The government will have to figure out if it was a good decision, in retrospect, to focus less on capex growth and more on fiscal deficit control.

HIGH FREQUENCY CORE SECTOR GROWTH (AUGUST 2024)

The yoy growth, that we have seen till now, captures point-to-point growth effectively, but misses out on high frequency trends. These are the short term trends. That is because yoy growth is too sensitive to the base effect. Here is the high frequency MOM data.

Core Sector Component	Weight	Aug-24 (YOY) %	Aug-24 (MOM) %	FY25 Cumulative (%) #
Coal	10.3335	-8.05%	-15.21%	+6.50%
Crude Oil	8.9833	-3.44%	-1.17%	-1.70%
Natural Gas	6.8768	-3.61%	-0.77%	+2.60%
Refinery Products	28.0376	-1.03%	-6.49%	+1.70%
Fertilizers	2.6276	+3.15%	-0.94%	+1.70%
Steel	17.9166	+4.54%	+1.67%	+7.30%
Cement	5.3720	-3.02%	+0.74%	+0.70%
Electricity	19.8530	-5.03%	-4.90%	+6.80%
Core Sector Growth	100.0000	-1.77%	-4.18%	+4.60%

Data Source: DPIIT (# FY25 is 5-months data)

There has been enough of discussion on the August yoy core sector growth and the cumulative core sector growth for FY25. Hence we will focus here only on the MOM high frequency growth in core sector. In July 2024 the MOM core sector growth at -0.85% was relatively subdued. However, that has furthered deepened to -4.18% in August 2024. If you look at the MOM growth in the 8 core sectors, 6 have shown negative growth, with only cement and steel showing positive growth on MOM basis. On an MOM basis, coal output saw the deepest double-digit cut in output. When negative MOM core sector growth is combined with negative YOY core sector, it reinforces a grave downtrend. The next couple of months could throw more light on this area.

CHARTING LONG TERM STORY OF CORE SECTOR GROWTH

Here is a quick take on the core sector growth over last 12 financial years from FY13 to FY24. In addition, for a better comparison, we have also provided 5-month (Apr-Aug) cumulative data for last 3 fiscal years.

Months	Overall (%)	Coal (%)	Crude Oil (%)	Natural Gas (%)	Refinery (%)	Fertilizers  (%)	Steel  (%)	Cement (%)	Electricity  (%)
2012-13(Apr-Mar)	3.82	3.19	-0.60	-14.42	7.15	-3.32	7.92	7.46	4.00
2013-14(Apr-Mar)	2.56	0.95	-0.19	-12.92	1.39	1.47	7.32	3.74	6.05
2014-15(Apr-Mar)	4.94	8.05	-0.87	-5.33	0.17	1.30	5.11	5.91	14.81
2015-16(Apr-Mar)	2.98	4.83	-1.39	-4.72	4.88	7.02	-1.28	4.62	5.69
2016-17(Apr-Mar)	4.76	3.19	-2.53	-1.03	4.89	0.21	10.74	-1.23	5.84
2017-18(Apr-Mar)	4.28	2.57	-0.90	2.86	4.58	0.03	5.57	6.33	5.32
2018-19(Apr-Mar)	4.37	7.38	-4.15	0.82	3.13	0.34	5.09	13.31	5.16
2019-20(Apr-Mar)	0.36	-0.35	-5.95	-5.64	0.22	2.67	3.36	-0.88	0.94
2020-21(Apr-Mar)	-6.39	-1.87	-5.21	-8.17	-11.22	1.65	-8.66	-10.80	-0.49
2021-22(Apr-Mar)	10.41	8.55	-2.64	19.24	8.93	0.69	16.94	20.77	7.96
2022-23(Apr-Mar)	7.80	14.84	-1.72	1.61	4.83	11.32	9.26	8.71	8.89
2023-24(Apr-Mar)	7.61	11.76	0.61	6.05	3.56	3.71	12.54	8.86	7.06
2022-23(Apr-Aug)	10.00	22.70	-1.10	2.60	10.80	11.40	6.80	10.70	10.60
2023-24(Apr-Aug)	8.00	11.50	-0.40	3.90	3.70	7.50	16.10	12.90	5.40
2024-25(Apr-Aug)	4.60	6.50	-1.70	2.60	1.70	1.70	7.30	0.70	6.80

Data Source: DPIIT (FY2024-25 data is for 5 months)

Here are the major takeaways from the core sector data trends in the last decade.

• FY24 growth was impressive at an upgraded 7.60%, and only slightly lower than FY23 at 7.80%; despite a relatively higher base. The FY22 growth at 10.41% is not exactly comparable as it comes on the back of the tepid pandemic base. FY24 is on a very high base after 2 successive years of frenetic growth.
• From the pre-COVID levels, infrastructure output is 22% higher and this is after factoring in the negative impact of the pandemic. In short; post-pandemic, Indian core sector has bettered pre-COVID average growth rate; which is a big positive takeaway.
• Over the last 12 full fiscal years, the average core sector growth has been around 4.0%, so at 4.60% annualized growth in the first 5 months of FY25; the Indian infrastructure sector surely looks better than the historic trend. However, this disrupts the average of 8.6% in the last 3 fiscal years.

In the last 3 years, the core sector growth has substantially benefited from the post-pandemic recovery coupled with the higher capex allocation by the government. In FY23 and FY24; the capex allocations in the budget grew by 30% yoy, while in FY25 it grew by 11.1%. This will leave the government with a lot to chew over.

WILL THE RBI MAKE UP FOR LOWER CAPEX WITH RATE CUTS?

With the Fed going for the jugular with a 50 bps rate cut, the ball is in RBI’s court on whether to implement rate cuts immediately or not. For FY25, capex was maintained at ₹11.11 Trillion; showing yoy growth of just 11%. While the fiscal deficit was cut further to 4.9% of GDP for FY25, the reduced capex allocation has surely had an impact on core sector output. One way the RBI can make up for this shortfall is though a symbolic rate cut in the October policy. This will reduce the funding cost and make infrastructure financing a lot simpler. It remains to be seen whether the RBI will buy the infrastructure argument when the MPC meets in early October.