December 2023 core sector growth tapers to 3.82% as base effect sharpens

1 Feb 2024 , 09:20 AM

Core sector growth tapers to 3.82% in December 2023 on higher base

On the last working day of January 2024 (exactly a day ahead of the Union Budget 2024-25), the Office of the Economic Advisor published core sector growth for the month of December 2023. Simultaneously, it also put out the cumulative core sector growth for the first nine months of FY24. In November, the core sector growth had dipped below 8% for the first time after a gap of 5 months to 7.90%. However, the base effect sharpened in December as the core sector growth fell further to 3.82%. The corresponding core sector growth in December 2022 stood at 8.28% and that lowered the core sector growth in December 2023, due to a higher base. The base is likely to be high for two more months before tapering, post which the core sector number should look better. However, the latest core sector growth is sharply lower than the average growth of 8.26% in last 12 months.

The numbers have been relatively impressive in last few months. After 8.37% core sector growth in June 2023 and 8.55% in July 2023, core sector growth got a big boost to 13.42% in August 2023. September growth still stayed robust at 9.44%, while the core sector growth bounced back to 12.03% in October. The first signs of tapering were visible in November 2023 when the core sector fell below the 8% mark and the fall has been much sharper in the month of December 2023. On the downside, December 2023 growth slackening in refining, steel, electricity in natural gas. However, the core sector growth improved in December for fertilizers and cement. Only coal output was flat. In terms of weighted impact, the pressure came from refinery products and steel; which have 46% weightage in the core sector basket. Core sector measures infrastructure output in India, and combines 8 basic building blocks of the economy. It is reported with a lag of one month; and is an input for IIP and GDP growth.

Has government capex spending slowed in December 2023?

One question is whether the government going slow on capex has been impacting the core sector growth. While it is true that the government has been going slow on fresh capex commitments ahead of the Union Budget, most of the existing capex schedules are ongoing. Also, the government has set the momentum in motion and it is now the private sector capex that is also taking charge. Hence, while the impact of government going slow on fresh capex could be incremental, it is unlikely to hit core sector growth in a big way. The centre wants to rein in fiscal deficit at 5.9% of GDP for FY24 and further cut it to 5.3% in FY25 and 4.5% in FY26. Some slowing of capex is inevitable, but as the high frequency (we will see that later) core sector growth shows, short term indicators are still very strong.

Core sector revisions in December 2023?

The Indian government had triggered core sector growth by doubling its capex in Union Budget 2023-24. This was magnified by private sector participation as is evident from the overflowing order books of capital goods companies in India. While core sector captures the absolute growth, the revisions capture the underlying trend. Here is a quick dekko. The first revision for November 2023 raised core sector growth by 24 bps from 9.20% to 9.44%. At the same time, the final revision for November 2023 upgraded core sector growth by 6 bps from 7.84% to 7.90%. These revisions bode well for December 2023 numbers.

Months	Overall (%)	Coal (%)	Crude Oil (%)	Natural Gas (%)	Refinery (%)	Fertilizers   (%)	Steel  (%)	Cement (%)	Electricity   (%)
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	2.15	9.95	9.49	1.79	16.35	19.74	15.31
Sep-23	9.44	16.03	-0.36	6.57	5.55	4.21	14.79	4.75	9.87
Oct-23	12.03	18.41	1.31	9.93	4.24	5.35	10.69	17.43	20.34
Nov-23	7.90	10.90	-0.40	7.60	12.44	3.36	9.40	-4.03	5.73
Dec-23	3.82	10.63	-1.03	6.59	2.63	5.85	5.91	1.28	0.57

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 December 2022 to December 2023. The positive momentum has been sustained since March 2023; barring some minor glitches to the trend; and that was also due to the sharp movements in the base year indices. Out of the 8 core sectors, 7 sectors showed positive growth traction in December 2023; with only crude oil extraction showing negative output growth. Core sector growth weakness came from the slackening of momentum in refinery products and steel, which have a combined weightage of 46% in the core sector basket.

December 2023 – Sectoral leaders and laggards in Infrastructure

The two connected sectors that have driven core sector growth are coal and electricity. For December 2023, coal output growth was flat at 10.63% while electricity generation was sharply lower at 0.57%. Power demand had peaked on record consumption in the last few months and that appears to have slowed in December 2023. Cement sector saw a sharp turnaround in growth from -4.03% to 1.28% while fertilizers also saw growth expanding from 3.36% to 5.85%. Coal output was flat for the year.

The big pressure points were refinery products which saw growth tapering from 12.44% to 2.63% while sector growth faltered from 9.40% to 5.91%. Even Power sector saw growth tapering from 5.73% to 0.57%. These 3 sectors have a combined weightage of 65.8%. That is what put pressure on the core sector growth in December 2023. This is contrast to previous months when the heavyweight sectors were actually the outperformers.

High frequency core sector growth for December 2023

We now change focus from yoy growth to MOM growth, which is the high frequency measure. One reason is, yoy growth does not capture short-term fluctuations and is very vulnerable to base effect. That is where high frequency data (MOM) growth in core sector comes in handy. The shaded column in the table below represents high frequency MOM data; providing a short term picture of core sector performance. What do we take away from the positive reading in the high frequency core sector growth for December 2024?

Core Sector Component	Weight	Dec-23 (YOY) %	Dec-23 (MOM) %	FY24 Cumulative (%) *
Coal	10.3335	+10.63%	+9.86%	+12.49%
Crude Oil	8.9833	-1.03%	+2.51%	-0.27%
Natural Gas	6.8768	+6.59%	+2.91%	+5.56%
Refinery Products	28.0376	+2.63%	+6.29%	+4.71%
Fertilizers	2.6276	+5.85%	+2.99%	+6.23%
Steel	17.9166	+5.91%	+5.30%	+13.34%
Cement	5.3720	+1.28%	+18.69%	+9.17%
Electricity	19.8530	+0.57%	+2.30%	+6.90%
Core Sector Growth	100.0000	+3.82%	+5.94%	+8.07%

Data Source: DPIIT (* FY24 is 9-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. We can see that hydrocarbons have played a major role in boosting core sector with refining growing at 6.29%. It is also the singular product with the highest weightage in the basket. Interestingly, the MOM growth is positive across all the 8 sectors, which is the reason the MOM core sector basket growth stands at 5.94%.

The point to note here is the coal output and the cement output, which have shown double digit growth in high frequency core sector growth. This goes to show that the both sectors have a lot of positive momentum favouring them. Had it not been for the high base of December 2022, these two sectors would have grown at a much higher rate. Hopefully, this sharp bounce in high frequency growth should translate into better numbers, going ahead!

Charting core sector growth – The 10-year story

Here is how core sector growth panned out over the last decade. From FY13 to FY23, we have pinned full year data. For FY24 data here is 9 months data from April to December 2023 and that is likely to give a reasonably clear picture of how the full fiscal year FY24 is likely to pan out. We also added the comparable period of 9 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-Dec)	12.61	10.59	-2.63	22.38	10.02	-0.12	22.25	26.27	9.42
2022-23(Apr-Dec)	8.09	16.51	-1.34	0.93	5.45	9.65	7.93	10.71	9.87
2023-24(Apr-Dec)	8.07	12.49	-0.27	5.56	4.71	6.23	13.34	9.17	6.90

Data Source: DPIIT (FY2023-24 data is for 9 months)

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

• FY24 growth in the first 9 months is quite impressive at 8.07%, and is almost at par with FY23, although there are still 3 months to go. This is at par with the comparable period for FY23 at 8.09%. The cumulative growth for FY24 may appear optically lower than FY22; but then FY22 growth was on the base of negative COVID period growth.
• What do we quickly gather from the 10-year 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 pre-COVID average growth rate, thanks to the government’s infrastructure thrust.
• Over the last 11 years, the average core sector growth has been around 3.62%, so at 8.07% cumulative growth in FY24, the core sector is a good 445 bps above the average. This growth is despite headwinds at a domestic and international level.

That brings us to the core question; will the slowing core sector growth be influenced by the Union Budget and how will RBI react to this reading?

Core sector growth – Union Budget and Monetary policy impact

A lot of the core sector growth in the coming months will predicate on how aggressive the government gets on capex in the Interim Budget. Agreed, this is not the full budget, but the indications are what would really matter. On the monetary policy front, the RBI has already upgraded the GDP growth for FY24 in its December policy from 6.5% to 7.0%; and that was clearly based on the robust core sector performance. The core sector growth was the best reflection of the higher emphasis placed by the government on capex spending in FY24.

Strong capex indications in the Union Budget lays the base for growth. The government did trigger a revival in the capital cycle and the private sector is now taking charge. Will the RBI 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 rates. In the January policy statement, the Fed has refused to commit yet on rate cuts, although the RBI may be driven by its own compulsions. For now, the Union Budget is the signal to watch out for!