Core sector growth for September 2023 stays elevated at 8.13%

1 Nov 2023 , 09:23 AM

Core sector growth above 8% for four months in a row

On the last working day of October 2023, the Office of the Economic Advisor published the core sector growth for the month of September 2023 and the cumulative core sector growth figures for the first half of fiscal year FY24. This is the fourth month in a row that the core sector growth has been above 8%, which shows a lot of traction from the infrastructure sector. After 8.37% core sector growth in June 2023 and 8.40% in July 2023, the core sector figure got a big boost to 12.55% in August 2023. September growth remained robust at 8.13%. The good thing is that the strong growth in the core sector in the last 3 months comes on the back of a solid base, so you cannot even attribute to the low-base effect. In fact, the September 2023 core sector growth is on a base of 8.3% in September 2022. 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 September data gets reported on the last day of October. 

Just to give a brief background, the government has been heavily spending on infrastructure capex in the last couple of years and the results are visible in the form of higher core sector growth. In fact, the government has even focused on capex and infrastructure sector at the cost of revenue spending. The 8 sectors that comprise the core sector basket are the infrastructure pillars of the Indian economy. They include coal, crude oil, refinery products, natural gas, fertilizers, steel, cement, and electricity. What exactly is the significance of core sector growth and what are the externalities for GDP growth? Core sector matters because the 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. For September, the growth traction was led by Coal, Steel, Electricity, and natural gas production.

How core sector revisions played out in September 2023?

From a low of 0.7% in October 2022, the core sector growth has consistently picked up momentum in the last few months, with a secular uptrend seen since March 2023. One can argue that September core sector growth is lower than August 2023, but that is on a much higher base and that must be adjusted for. However, what is truly gratifying about September 2023 core sector output is that it marks the fourth consecutive month when the core sector growth has been above the 8% threshold. Let us quickly look at revisions to the core sector growth. The first revision for August 2023 upgraded the core sector growth by 45 basis points from 12.10% to 12.55%. At the same time, the final revision for June 2023 core sector output also upgraded growth by 7 bps from 8.30% to 8.37%. Revisions are decisively positive and bode well for September 2023 numbers.

Months	Overall (%)	Coal (%)	Crude Oil (%)	Natural Gas (%)	Refinery (%)	Fertilizers   (%)	Steel  (%)	Cement (%)	Electricity   (%)
Sep-22	8.30	12.06	-2.33	-1.70	6.60	11.78	7.67	12.44	11.58
Oct-22	0.73	3.80	-2.20	-4.24	-3.10	5.42	5.76	-4.16	1.19
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	8.40	14.95	2.06	8.92	3.56	3.29	14.22	6.89	7.95
Aug-23	12.55	17.89	2.15	9.95	9.49	1.79	12.44	19.32	15.31
Sep-23	8.13	16.13	-0.36	6.53	5.55	4.21	9.63	4.66	9.29

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 September 2022 and September 2023. The upward momentum on an average, has been sustained since March 2023. During the period, the core sector had gradually moved up from 4.24% to 12.55% in August before normalizing to 8.13% in September 2023. Out of the 8 core sectors, 7 showed positive growth in September 2023 on a yoy basis; with only crude oil extraction falling back into negative after a gap of 2 months. While the 12.55% growth in August may be more of an exceptional spike, September growth at 8.13% shows a more normalized and sustainable trend in the current fiscal year FY24. In September 2023, Coal sector output grew in double digits while steel and electricity grew at a rate of above 9%. Natural gas and refinery products grew at more than 5.5%. 

September 2023 – How sectors defined the core sector narrative

The two connected sectors that have driven core sector growth are coal and electricity. For September, coal grew at 16.13% while electricity generation grew at 9.29%. The boost to power output amidst record power demand has led to robust demand for coal. The government not only opened the floodgates to coal imports, where necessary, but has also pushed for maximization of output of coal domestically. Steel grew at an impressive 9.66% as the post monsoon demand from the construction and infrastructure space continues to be robust.

Even other key sectors like oil refining (which has the highest weightage) and natural gas production grew at over 5.5%, while the only sector in the negative was the oil extraction sector due to obvious reasons of output pressures. Among other sectors, the cement output tapered while the output of fertilizers bounced back sharply in September. The next boost to the fertilizer output would be the Rabi season, and a lot will predicate on when this Rabi sowing actually starts. 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 making all the difference.

High frequency core sector growth for September 2023

Till this point, our focus has been on yoy growth. However, the yoy growth has certain limitations. For instance, the yoy growth does not capture the short term fluctuations in data points. That is where the high frequency data in the form of MOM (month-on-month) growth in the core sector components comes in handy. The shaded column in the table below represents the high frequency MOM data; which provides a short term picture of the core sector performance. The YOY growth is vulnerable to the base effect and the gaps are captured by the high frequency growth column.

Core Sector Component	Weight	Sep-23 (YOY) %	Sep-23 (MOM) %	FY24 Cumulative (%) *
Coal	10.3335	+16.13%	-1.50%	+12.20%
Crude Oil	8.9833	-0.36%	-4.41%	-0.38%
Natural Gas	6.8768	+6.53%	-4.38%	+4.31%
Refinery Products	28.0376	+5.55%	-6.31%	+3.97%
Fertilizers	2.6276	+4.21%	-0.69%	+6.96%
Steel	17.9166	+9.63%	-1.16%	+14.24%
Cement	5.3720	+4.66%	-8.43%	+11.49%
Electricity	19.8530	+9.29%	-7.14%	+6.00%
Core Sector Growth	100.0000	+8.13%	-4.80%	+7.83%

Data Source: DPIIT (* FY24 is 6-months data)

A quick recap of the recent trend in MOM data. The high frequency data had turned slightly negative in June and July 2023. From -0.9% in June, the MOM core sector growth worsened to -2.2% in July 2023. However, August 2023 saw the MOM core sector growth bouncing back to +2.5%. The month of September has seen the MOM core sector growth falling sharply to -4.80% and that is understandable as the growth impulses in September are not as strong as August. However, there are two things to keep in mind. In fact, if you take the 8 sectors in the core sector basket in September 2023, all of them have shown negative growth, something we do not get to see normally. This can be attributed to the overall core sector growth tapering by more than 400 bps between August and September 2023.

Charting core sector growth over 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. For FY24. Remember, the FY24 data here is 6 months data from April to September 2023 and it would give a reasonably clear picture of how the full fiscal year FY24 is likely to pan out. However, for better comparison, we have also added the comparable period of 6 months for the last two fiscal years of FY23 and FY22 and these 6 month 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-Sep)	16.87	11.67	-2.92	22.07	11.22	-1.25	36.54	37.81	12.77
2022-23(Apr-Sep)	9.75	20.99	-1.28	1.84	10.10	11.48	6.92	11.02	10.77
2023-24(Apr-Sep)	7.83	12.20	-0.38	4.31	3.97	6.96	14.24	11.49	6.00

Data Source: DPIIT (FY2023-24 data is for 6 months)

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

• FY24 growth in the first 6 months is quite impressive at 7.83%, despite a higher base. This is at par with FY23 at 7.8%. However, if you compare the 6 month period of FY24 with FY23 and FY22, then the current year still lags. It remains to be seen if there is pressure in the second half of FY24. Of course, base effect could be a major reason.

   

• It is important to use the longer term annual data for a more secular view. From the pre-COVID levels of infrastructure output, the core sector output is 21-23% higher and this is after the negative impact we had during the pandemic shutdown. That means; post pandemic, Indian core sector has bettered the pre-COVID average growth rate (by a margin) and that is an outcome of the infrastructure thrust provided by the central government.

   

• Over the last 11 years, the average core sector growth has been 3.6%, so at 7.83% cumulative growth in FY24, the core sector is a good 400 bps better than the average. This is despite the headwinds at a domestic and international level.

In terms of capex and infrastructure spending, the previous decade was like a lost decade. That was the time when the winds were favoring the developed markets more than the emerging markets like India. The government has triggered a revival in the capital cycle and the private sector is taking over; and that is the good news. That is evident from the way FPIs are falling over each other to buy capital goods stocks in India. Behind the overflowing order books of capital goods companies, there is a subtle story. Much of the action in the coming months, from an investment perspective could be seen in these core sectors.