Feb-22 core sector expands 5.79% on refining and natural gas boost

1 Apr 2022 , 08:49 AM

Over the last 13 months, the core sector growth was positive in 12 out of these months, with Feb-21 being the exception. Core sector growth between Mar-21 and Aug-21 was tad misleading as low base effect magnified the growth. Post Sep-21, base effect is neutralized, so core sector growth is more representative. Core sector growth for Feb-22 at 5.8% looks fairly exciting, but that is due to the negative base effect that it looks magnified.

Now for the core sector data revisions. Final revisions in core sector growth for Nov-21 marked a 10 bps upgrade from 3.1% to 3.2%. The first revision for Jan-22 raised core sector by 30 bps from 3.7% to 4.0%. If you consider core sector numbers for Feb-22 and compare with Feb-20, it is up 2.31%; which is lower than the Jan-22 performance on a 2 year basis. That means; there is fairly large base effect in the Feb-22 growth, but the good news is that now the FY22 monthly numbers are consistently higher than FY20 numbers.

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

Core sector or infrastructure sector has larger ramifications for IIP and GDP growth. Core sector has a weightage of 40.27% in IIP growth. If you look at a 2-year comparison of FY22 over FY20, then Jul-21 was the first month when core sector was above Jul-19 levels. Between Aug-21 and Oct-21, this advantage gradually built up before losing momentum in Nov-21 due to the Omicron scare. In Dec-21, the 2-year growth over pre-COVID levels picked up to 4.24% and further to 5.05% in Jan-22. Feb-22 has again tapered on a 2-year basis to just about 2.31% due to the base effect and the impact of high crude prices.

FY22 core sector 201 basis points higher than FY20 levels

Core sector growth on a monthly basis is a very useful measure as a high-frequency barometer but it is still too vulnerable to the base effect. It is good as a momentum indicator, but a more structural picture becomes evident by comparing the cumulative core sector data of the 11-months of FY22 with the corresponding 11 months of FY20.

The cumulative growth for Apr-Feb 2022 period is pegged at +11.0%. This is against -8.1% contraction in the Apr-Feb 2021 period, which was the impact of COVID driven lockdowns. Thus, on a pre-COVID basis, core sector is now 2.01% above corresponding 2019-20 levels; which is almost at the same level it was at the end of Jan-22.

Refining and Steel give big boost to core sector in Feb-22

Here we look at the break-up of the core sector based on YOY indicators, pre-COVID growth and high-frequency growth.

Core Sector Component	Weight	Feb-22 over Feb-21 (%)	MOM over Jan-22 (%)	Apr-Feb YOY(%)
Coal	10.3335	+6.6%	-0.0%	+9.8%
Crude Oil	8.9833	-2.2%	-9.5%	-2.6%
Natural Gas	6.8768	+12.5%	-9.1%	+20.5%
Refinery Products	28.0376	+8.8%	-8.0%	+9.2%
Fertilizers	2.6276	-1.4%	-11.1%	-0.4%
Steel	17.9166	+5.7%	-5.2%	+18.4%
Cement	5.3720	+5.0%	-4.4%	+22.4%
Electricity	19.8530	+4.0%	-3.3%	+8.1%
Overall Core Sector Growth	100.0000	+5.8%	-5.3%	+11.0%

Data Source: DPIIT

Here are important takeaways from the table above.

a) The first data column is the weightage column which tells you how much impact a change in a particular component can have on the overall core sector growth. Refinery products, electricity and steel have a high combined weight of over 65%.

b) The second column is  the break-up of yoy core sector growth of 5.8%. Here, 6 out of 8 core sectors are in the positive. While crude has remained in the negative for some time, fertilizers negative growth has deepened due to supply chain constraints.

c) On a yoy basis, the big percentage drivers of growth are Refining Products, Natural Gas, Cement and Steel, of which refining and steel contribute substantially due to their weight. Robust natural gas prices and strong steel demand have been big drivers.

d) The third column captures high-frequency MOM growth. This has turned negative for the first time since November 2021. Back in Nov-21, high frequency growth was impacted by the Omicron, while this time it is the war situation and surge in oil prices.

e) The last column covers cumulative data for the first 11 months of FY22. From 108 basis points (2-year cumulative growth) in Nov-21, it improved to 157 basis points in Dec-21, 200 basis points in Jan-22 and stable at 201 basis points in Feb-22.

f) There are two positive inferences. Even if you factor the base effect, the 2 year growth appear to be positive and stable. Secondly, the momentum indicator still shows pressure in high frequency terms and a lot will predicate on how oil and inflation pan out.

How do we expect core sector growth for FY22 overall?

Core sector has a 40.27% weightage in IIP and needs to provide the much-needed impetus if IIP  and GDP have to pick up.

Year	2012-13	2013-14	2014-15	2015-16
Core Sector Growth (%)	3.8%	2.6%	4.9%	3.0%
Year	2016-17	2017-18	2018-19	2019-20
Core Sector Growth (%)	4.8%	4.3%	4.4%	0.4%
Year	2020-21	Apr-Feb FY22
Core Sector Growth (%)	-6.4%	11.0%

Data Source: DPIIT

The first 11 months of FY22 look impressive in a very long time at +11.0%, but that effect is waning and we could most likely close FY22 with core sector growth of around 10%. That would still mean that the core sector growth would be 3% higher than the FY20 (pre-COVID levels). However, if you look at annualized growth between FY19 and FY22, then the compounded growth over the 3 year period is less than 1%.

As India tries to get output back to the pre-COVID levels, many industries like refining, electricity, steel are all going to face severe supply chain constraints. The war situation in Ukraine was already bad and the Rouble-Gold peg is only going to make things worse for the global economy. If India can get a hang of its supply chain constraints, then we could see genuine positive growth in infrastructure sector from FY23 onwards.