Core sector growth for November 2023 tapers to 7.84% on base effect

31 Dec 2023 , 08:04 AM

Core sector growth tapers to 7.84% in November 2023 on higher base

On the last working day of December 2023, the Office of the Economic Advisor published the core sector growth for the month of November 2023 as well as the cumulative core sector growth figures for the first eight months of fiscal year FY24. After 5 months of the core sector growth staying above the 8% mark, the core sector growth finally fell below that mark to register 7.84% growth in November 2023. This dip in growth is largely on account of the base effect, with the November 2022 growth being relatively strong at 5.70%. That was one of the key reasons for the lower core sector growth in the month of November 2023. 

The numbers have been relatively impressive in the last few months. After 8.37% core sector growth in June 2023 and 8.55% in July 2023, the core sector figure got a big boost to 13.42% in August 2023. September growth remained robust at 9.20%, while the core sector growth bounced back to 12.03% in October. In comparison, November growth at 7.84% is the first time in the last 6 months that core sector growth has been under 8%. The negative impact was sharp due to a fall in cement output, but was also largely compensated by a surge in refined petroleum products. One thing to remember is the base effect. The October 2023 core sector growth was on a base of 0.73% in October 2022; while the current growth rate is on the base of 5.70% in November 2022. Core sector is a barometer of infrastructure growth in India, and combines 8 basic building blocks of the economy. It is reported with a lag of one month; and is a key determinant of IIP and GDP growth for the Indian economy.

Private capex catches up with government capital spending

It needs no reiteration that the government has been heavily spending on infrastructure capex in the last couple of years. While the results were visible, one thing that was awaited was the private sector participation in the capex. If you look at the November 2023 core sector, much of the swing is coming from private sector contribution to core sector. The robust growth in steel and oil refining as well as the sharp fall in cement output had private sector investments as the swing factor. The are 8 sectors in the core sector basket and these include; coal, crude oil, refinery products, natural gas, fertilizers, steel, cement, and electricity. Core sector accounts for 40.27% of overall IIP (index of industrial production) basket, which is an important lead indicator of manufacturing GDP. 

Core sector revisions in November 2023?

A cursory glance at the table below would tell you how the core sector has now stabilized at a much higher level in the last six months. The mean growth of the core sector in the last 6 months is 9.9%, which his really impressive. While government triggered the infrastructure growth by doubling its capex in Budget 2023, the private sector has also chipped in as is evident from the overflowing order books of capital goods companies in India. While core sector captures the absolute growth, it is the revisions that capture the underlying trend. Let us look at revisions to the core sector growth. The first revision for October 2023 cut the core sector growth by 4 basis points from 12.07% to 12.03%. At the same time, the final revision for August 2023 core sector output upgraded growth by 87 bps from 12.55% to 13.42%. These revisions bode well for the November 2023 numbers.

Months	Overall (%)	Coal (%)	Crude Oil (%)	Natural Gas (%)	Refinery (%)	Fertilizers   (%)	Steel  (%)	Cement (%)	Electricity   (%)
Nov-22	5.70	12.26	-1.08	-0.68	-9.30	6.37	11.52	29.13	12.71
Dec-22	8.28	12.29	-1.16	2.60	3.69	7.25	12.34	9.51	10.39
Jan-23	9.67	13.61	-1.06	5.22	4.54	17.91	14.35	4.70	12.66
Feb-23	7.38	8.97	-4.90	3.13	3.32	22.23	12.35	7.42	8.15
Mar-23	4.24	11.67	-2.85	2.67	1.54	9.72	12.09	-0.20	-1.57
Apr-23	4.57	9.14	-3.55	-2.86	-1.50	23.54	16.56	12.36	-1.12
May-23	5.23	7.23	-1.94	-0.33	2.78	9.71	11.96	15.92	0.83
Jun-23	8.37	9.76	-0.56	3.48	4.58	3.44	21.31	9.95	4.22
Jul-23	8.55	14.95	2.06	8.92	3.56	3.29	14.92	6.89	7.95
Aug-23	13.42	17.89	2.14	9.95	9.49	1.79	16.35	19.74	15.31
Sep-23	9.20	16.03	-0.36	6.57	5.55	4.21	13.76	4.62	9.87
Oct-23	12.03	18.41	1.31	9.93	4.24	5.35	10.69	17.43	20.34
Nov-23	7.84	10.90	-0.40	7.60	12.44	3.36	9.11	-3.61	5.63

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

The table above provides the core sector growth trend for a period of 13 months between November 2022 and November 2023. The upward momentum has been sustained since March 2023; barring some minor glitches to the trend. Out of the 8 core sectors, only 6 sectors showed positive growth traction in November 2023 on a yoy basis. Crude oil extraction and cement manufacturing saw negative output growth in November 2023. However, with the base rate of growth constantly on the rise, it is very likely that the core sector growth may face an element of pressure in the coming months.

November 2023 – How sectors defined the core sector narrative

The two connected sectors that have driven core sector growth are coal and electricity. For October 2023, coal output grew at 18.41% while electricity generation grew at 20.27%. The boost to power output amidst record power demand has led to robust demand for coal; since thermal power still remains the mainstay of power generation in India. The government not only opened the floodgates to coal imports, where necessary, but has also pushed for maximization of domestic coal output. Cement grew at an impressive 17.08% and steel at 11.04% as the post monsoon demand from the construction and infrastructure space continues to be robust and building activity is also picking up on the residential front.

Even other key sectors like oil refining (which has the highest weightage) and natural gas production grew at 4.24% and 9.93% respectively. It looks like a more friendly gas policy and higher gross refining margins are chipping in. Among other sectors, fertilizers managed to grow over 5% while even crude oil saw growth of 1.31%. The good news is that the high weight sectors like refinery products, steel, electricity, and coal (76% between them) are seeing robust growth; and that is what is driving the record rally in the core sector.

High frequency core sector growth for November 2023

Till this point, our discussions have focused around yoy growth in the core sector output. However, yoy growth has limitations for a couple of reasons. For instance, yoy growth does not capture the short term fluctuations in data points and the yoy growth is also very vulnerable to the base effect. That is where high frequency data in the form of MOM (month-on-month) growth in core sector comes in handy. The shaded column in the table below represents high frequency MOM data; which provides a short term picture of the core sector performance. While the yoy core sector growth gives you the longer term trend, it is the MOM high frequency core sector growth that actually gives you the momentum picture on the infrastructure sector.

Core Sector Component	Weight	Nov-23 (YOY) %	Nov-23 (MOM) %	FY24 Cumulative (%) *
Coal	10.3335	+10.90%	7.62%	+12.79%
Crude Oil	8.9833	-0.40%	-3.76%	-0.17%
Natural Gas	6.8768	+7.60%	-3.82%	+5.43%
Refinery Products	28.0376	+12.44%	+4.47%	+5.00%
Fertilizers	2.6276	+3.36%	-2.15%	+6.28%
Steel	17.9166	+9.11%	-2.45%	+14.22%
Cement	5.3720	-3.61%	-13.08%	+10.33%
Electricity	19.8530	+5.63%	-13.58%	+7.65%
Core Sector Growth	100.0000	+7.84%	-3.35%	+8.60%

Data Source: DPIIT (* FY24 is 8-months data)

Broadly, there are two categories of sectors in the core sector basket. The hydrocarbons segment comprising of crude oil extraction, refining and natural gas has combined weight of 43.9% in the overall core sector basket. Obviously, this segment has a huge weight in the overall core sector calculation. For the first time in nearly two years, we see that hydrocarbons have played a major role in boosting the core sector with refining growing at 12.44%. It is also the product with the highest weightage in the basket. This surge is largely on account of a spike in gross refining margins and subdued crude prices in recent weeks.

There are two things to bear in mind here. If you take the 8 sectors in the core sector basket in November 2023, 6 out of the 8 core sectors have shown positive growth, with oil extraction and cement showing negative growth. Cement de-growth is on account of an inordinately high base last year. However, the high frequency MOM data indicates that core sector growth momentum is unfavourable.

Charting core sector growth – The 10-year story

Here is how core sector growth has panned out over last decade. From FY13 to FY23, we have pinned full year data. For FY24 data here is 8 months data from April to November 2023 and it would give a reasonably clear picture of how the full fiscal year FY24 is likely to pan out. We also added the comparable period of 8 months for the last two fiscal years of FY23 and FY22 and these comparisons have been shaded in grey. 

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	1.60	4.82	11.31	9.26	8.70	8.89
2021-22(Apr-Nov)	13.87	11.54	-2.73	22.75	10.61	-0.59	26.14	28.22	10.26
2022-23(Apr-Nov)	8.06	17.21	-1.37	0.71	5.70	9.97	7.34	10.89	9.80
2023-24(Apr-Nov)	8.60	12.79	-0.17	5.43	5.00	6.28	14.22	10.33	7.65

Data Source: DPIIT (FY2023-24 data is for 8 months)

What are the major takeaways from the core sector data trends in the last decade? 

• FY24 growth in the first 8 months is quite impressive at 8.60%, and is building heft despite a higher base. This is slightly better than the comparable period for FY23 at 8.06%. The cumulative growth for FY24 may look lower than FY22, but that is more optical as FY22 growth was on the back of negative COVID period growth.

   

• Here is a bird’s eye view of the data. From the pre-COVID levels, the infrastructure output is 23-25% higher and this is after the negative impact of the pandemic is factored in. That means; post pandemic, Indian core sector has bettered the pre-COVID average growth rate, thanks to the infrastructure thrust of the central government.

   

• Over the last 11 years, the average core sector growth has been around 4%, so at 8.60% cumulative growth in FY24, the core sector is a good 460 bps above the average. This growth is despite headwinds at a domestic and international level.

Will the RBI outlook be influenced by core sector data?

To an extent, the RBI upgrading the GDP growth for FY24 in its December policy from 6.5% to 7.0% was based on robust core sector performance. It was one of the key factors, as it lays the base for overall growth. In a sense, government has triggered a revival in the capital cycle and the private sector is now taking over. Will the government use the core sector data to tighten or loosen rates? Looks unlikely at this time since the RBI may not want to spoil the party by hiking raters. However, with the US Fed likely to embark on rate cuts from 2024 and Indian real raters already at 2%, rate cuts could be a logical choice for the RBI. That would actually be good news for the core sector growth!