Core sector growth for June 2023 bounces sharply to 8.2%

31 Jul 2023 , 08:02 PM

The core sector is a barometer of infrastructure growth in India, and combines 8 basic building blocks of the economy. In India, the core sector growth is typically reported with a lag of one month; which means the June data gets reported on the last day of July and so on. The 8 sectors that comprise the core sector basket are coal, crude oil, refinery products, natural gas, fertilizers, steel, cement, and electricity. What exactly is the significance of core sector growth? Core sector basket accounts for 40.27% of overall IIP (index of industrial production) basket, and is an important lead indicator of manufacturing GDP. Within core sector basket, refinery products, electricity and steel have the highest weightage.

How core sector revisions looked in June?

After dipping sharply lower in October 2022, the core sector growth has consistently picked up momentum in the last few months. Core sector growth had bounced to a high of 9.7% in January 2023, but then tapered to 4.3% in April and stayed around 5% in May. However, what is gratifying about June 2023 core sector output is that it has come in at an impressive 8.2% despite a high base of 13.1% growth evinced in June 2022. That is largely due to a sharp growth in steel with new capacities coming up. It gets more pronounced due to the substantial weightage that steel has in the core sector basket. Let us quickly look at revisions. The first revision for May 2023 upgraded the core sector growth by 70 basis points from 4.3% to 5.0%. The final revision for March 2023 also upgraded core sector growth by 60 bps from 3.6% to 4.2%. Revisions are decisively positive and bode well for June 2023.

Months	Overall (%)	Coal (%)	Crude Oil (%)	Natural Gas (%)	Refinery (%)	Fertilizers   (%)	Steel  (%)	Cement (%)	Electricity   (%)
Jun-22	13.1	32.1	-1.7	1.2	15.1	8.2	3.3	19.7	16.5
Jul-22	4.8	11.4	-3.8	-0.3	6.2	6.2	7.5	0.7	2.3
Aug-22	4.2	7.7	-3.3	-0.9	7.0	11.9	5.8	2.1	1.4
Sep-22	8.3	12.1	-2.3	-1.7	6.6	11.8	7.7	12.4	11.6
Oct-22	0.7	3.8	-2.2	-4.2	-3.1	5.4	5.8	-4.2	1.2
Nov-22	5.7	12.3	-1.1	-0.7	-9.3	6.4	11.5	29.1	12.7
Dec-22	8.3	12.3	-1.2	2.6	3.7	7.3	12.3	9.5	10.4
Jan-23	9.7	13.6	-1.1	5.2	4.5	17.9	14.3	4.7	12.7
Feb-23	7.4	9.0	-4.9	3.1	3.3	22.2	12.4	7.4	8.2
Mar-23	4.2	11.7	-2.8	2.7	1.5	9.7	12.1	-0.2	-1.6
Apr-23	4.3	9.1	-3.5	-2.8	-1.5	23.5	15.3	12.0	-1.1
May-23	5.0	7.2	-1.9	-0.3	2.8	9.7	10.9	15.3	0.8
Jun-23	8.2	9.8	-0.6	3.6	4.6	3.4	21.9	9.4	3.3

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

The table above is a detailed, analysis of the overall core sector growth trend for a period of 13 months between June 2022 and June 2023. The month of June 2023 has been decisively positive for the core sector. Out of the 8 core sectors, only 1 sector was marginally in the negative, while 7 sectors have shown positive growth. The average growth of 8.2% is reflective of a decisively positive turn in core sector output. In terms of positive impact; steel, coal, cement, and refineries made the bulk of the contribution.

June 2023 – Sectors that defined the core sector narrative

June 2023 saw 7 out of 8 core sectors in the green with just 1 sector in the red. Let us focus on the only core sector that contracted in June 2023. As usual, it was once again crude oil output fell by -0.6%. Crude oil output bore the brunt in the last few months due to ageing wells resulting in much lower domestic production.

Let us turn to the core sectors that were predominantly the leaders. In terms of percentage growth, steel led the way with 21.9% growth on the back of robust demand coming from infrastructure space as well as more capacities coming on stream. On the infrastructure boost story, another logical beneficiary was cement, which also showed 9.4% growth in the month of June. Coal out continues to flatter on the upside amidst robust demand from the thermal power sector. In June 2023, the coal sector saw output grow by 9.8% yoy. Other core sectors were relatively less aggressive, but robust nevertheless. 

Refinery output grew by 4.6%, and this space has shown a sharp turnaround in the last one month with crude being more easily available from Russia. Even natural gas output grew by 3.6% while fertilizers grew 3.4% yoy on the back of positive policy tailwinds. Finally, the critical power sector also saw output growth of 3.3%. The core sector, despite a high base, has shown an interestingly positive direction in June 2023.

Sneak peek at the high frequency data for June 2023

Till this point, our focus has largely been on yoy growth in core sector. The table below additionally looks at the high frequency MOM data also, to get a short term picture of the core sector performance. The YOY growth is extremely vulnerable to the base effect. Here we look at high frequency data as captured by month-on-month (MOM) core sector growth.

Core Sector Component	Weight	Jun-23 (YOY) %	Jun-23 (MOM) %	FY24 Cumulative (%) *
Coal	10.3335	+9.8%	-3.1%	+8.7%
Crude Oil	8.9833	-0.6%	-3.1%	-2.0%
Natural Gas	6.8768	+3.6%	+0.1%	+0.1%
Refinery Products	28.0376	+4.6%	-3.5%	+1.9%
Fertilizers	2.6276	+3.4%	-5.4%	+11.3%
Steel	17.9166	+21.9%	+1.2%	+15.9%
Cement	5.3720	+9.4%	+1.7%	+12.2%
Electricity	19.8530	+3.3%	+0.9%	+1.0%
Core Sector Growth	100.0000	+8.2%	-0.9%	+5.8%

Data Source: DPIIT (* FY24 is 3-months data)

The high frequency data has turned slightly negative in the month of June 2023. However, at -0.9%, it is not really a source of concern. More so, because, sectors with a high infrastructure and GDP multiplier effect like power, cement and steel are still showing positive growth and most of the pressure is coming only from the hydrocarbon related core sectors. In June 2023, core sector expanded sequentially in 4 sectors and contracted in 4 sectors. However, as stated earlier, what is material is that the expansion has happened in sectors like cement, steel, and power; which have strong externalities. The pressure is coming largely from the hydrocarbons. 

How core sector growth panned out in the last decade

Here is how core sector growth has panned out over last decade. From FY13 to FY23, we have pinned full year data while for FY24, the data is the annualized effect of 3 months. However, the FY24 data will get increasingly representative as we go along. The growth in core sector across 8 of its components for the last decade are captured in the table.

Months	Overall (%)	Coal (%)	Crude Oil (%)	Natural Gas (%)	Refinery (%)	Fertilizers   (%)	Steel  (%)	Cement (%)	Electricity   (%)
2012-13(Apr-Mar)	3.8	3.2	-0.6	-14.4	7.2	-3.3	7.9	7.5	4.0
2013-14(Apr-Mar)	2.6	1.0	-0.2	-12.9	1.4	1.5	7.3	3.7	6.1
2014-15(Apr-Mar)	4.9	8.0	-0.9	-5.3	0.2	1.3	5.1	5.9	14.8
2015-16(Apr-Mar)	3.0	4.8	-1.4	-4.7	4.9	7.0	-1.3	4.6	5.7
2016-17(Apr-Mar)	4.8	3.2	-2.5	-1.0	4.9	0.2	10.7	-1.2	5.8
2017-18(Apr-Mar)	4.3	2.6	-0.9	2.9	4.6	0.0	5.6	6.3	5.3
2018-19(Apr-Mar)	4.4	7.4	-4.1	0.8	3.1	0.3	5.1	13.3	5.2
2019-20(Apr-Mar)	0.4	-0.4	-5.9	-5.6	0.2	2.7	3.4	-0.9	0.9
2020-21(Apr-Mar)	-6.4	-1.9	-5.2	-8.2	-11.2	1.7	-8.7	-10.8	-0.5
2021-22(Apr-Mar)	10.4	8.5	-2.6	19.2	8.9	0.7	16.9	20.8	8.0
2022-23(Apr-Mar)	7.8	14.8	-1.7	1.6	4.8	11.3	9.3	8.7	8.9
2023-24(Apr-Jun)	5.8	8.7	-2.0	0.1	1.9	11.3	15.9	12.2	1.0

Data Source: DPIIT (FY2023-24 data is for 3 months)

What are the major takeaways from the core sector data trends in the last decade? If you leave out the 10.4% growth in core sector in FY22 (largely due to negative base effect), the FY23 core sector growth and the FY24 core sector growth (albeit for just 3 months) is extremely impressive and also the best in last decade. Above all, this growth comes on the back of a very high base for FY22; which makes the growth more genuine. There is one more point we need to understand here. From the pre-COVID levels of infrastructure output, the overall output is 18% higher and this is after the negative impact we had in the year of the pandemic. That means; post pandemic, Indian core sector has bettered the pre-COVID average growth rate and that largely comes from the infrastructure thrust given by the incumbent government at the centre.

Over the last 11 years, the average core sector growth has been 3.6%, so at 5.8% cumulative growth in FY24, the core sector is a good 220 bps better than the average. What is all the more gratifying is that this is despite the disruption caused by COVID. In terms of capital spending and infrastructure spending, the previous decade was almost like the lost decade. Now the capital investment cycle is coming back into action and that is reflected amply in the core sector numbers. That is the good news for markets.