Feb-24 core sector up 6.72%, as hydrocarbons step up tempo

31 Mar 2024 , 10:13 AM

CORE SECTOR 6.72% IN FEBRUARY 2024 ON FOSSIL FUEL BOOST

It was almost like an irony of sorts. At a time when the Indian economy is making rapid strides towards a green and clean economy, the biggest contribution to the core sector growth in February 2024 came from the fossil fuels. Coal output grew at 11.59% while crude oil output (you hard that right) bounced by 7.88% in the month. Another big surprise was natural gas output, that grew 11.26% in Feb-24 despite a strong base. Remember, natural gas is a green fuel, but the bounce was really sharp and the entire hydrocarbon chain comprising of oil extraction, oil refining and natural gas showed good growth in the month of February. The core sector growth is reported with a lag of one month by the Office of the Economic Advisor; and is a good barometer of infrastructure output in the economy.

CUMULATIVE CORE SECTOR GROWTH FOR FY24 ROBUST

Along with the monthly core sector numbers, the Office of the Economic Advisor also announced the cumulative core sector growth for FY24. the numbers for the first 11 months of FY24; up to end of February 2024 were also announced. For FY24, the core sector growth on a cumulative basis stood at 7.70%. This is slightly lower than the FY23 figure of 8.18% for the corresponding 11 months. The FY22 (corresponding 11 months) at 11.05% is misleading as it comes on a negative COVID base. However, FY24 growth comes on a very solid base and can be largely attributed to the sustained infrastructure spending by the government of India. In the previous two years, we saw government capex growing at 30%, while in the interim budget, the capex growth for FY25 was pegged at 11.1%.

WHY CORE SECTOR IS CRITICAL FOR INDIA?

Among other things, the core sector is critical as it is the measure of how rapidly the infrastructure sectors are growing in India. Now, infrastructure growth has strong multiplier effects due to the deep externalities it has. Hence when infrastructure grows at 6.72%, the downstream effect would be a multiple of that. The 8 infrastructure sectors include coal, electricity, crude oil, refinery products, natural gas, cement, steel, and fertilizers. The hydrocarbon family has a weightage of around 44% in the core sector basket; and that flattered with its performance in Feb-24. The core sector normally acts as a lead indicator for IIP and GDP because the core sector has 40.27% weightage in the IIP basket.

CORE SECTOR REVISIONS IN FEBRUARY 2024?

While the core sector acts as an important high frequency indicator of growth, it is also fairly dynamic in nature. Each core sector number goes through 2 revisions. The first revision happens after a month and the final revision happens after 3 months. Let us look at how the revisions panned out for core sector growth. The first revision for January 2024 core sector raised growth by 49 bps from 3.57% to 4.06%. The final revision for November 2023 upped core sector growth by 4 bps from 7.90% to 7.94%. This bodes well for Feb-24 numbers.

Months	Overall (%)	Coal (%)	Crude Oil (%)	Natural Gas (%)	Refinery (%)	Fertilizers  (%)	Steel  (%)	Cement (%)	Electricity  (%)
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	12.67	18.41	1.31	9.93	4.24	5.35	13.61	16.98	20.34
Nov-23	7.94	10.90	-0.40	7.60	12.44	3.36	9.77	-4.79	5.73
Dec-23	4.88	10.69	-1.03	6.59	4.03	5.85	7.57	3.81	1.23
Jan-24	4.06	10.21	0.70	5.52	-4.34	-0.56	8.67	5.65	5.66
Feb-24	6.72	11.59	7.88	11.26	2.63	-9.51	8.44	10.20	6.34

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 February 2023 to February 2024. The positive momentum has been sustained since March 2023; barring some minor aberrations in the trend; but these were largely on account of the base effect. The core sector numbers of December 2023 and January 2024 have seen sharp upward revisions, which bodes well for February 2024 too. What is gratifying is that the February 2024 core sector growth at 6.72% is despite a base of 7.38% in February 2023.

Out of the 8 core sectors in February 2024, 7 sectors showed yoy positive growth traction in February 2024; with only fertilizers showing negative growth. Fertilizer weakness came from slackening momentum in output after the end of Rabi season. The drop in capex spending by the government in the last few months to rein in fiscal deficit also pressured core sector items. But the overflowing order book positions of capital goods companies is good news.

FEBRUARY 2024 – SECTORAL LEADERS AND LAGGARDS

The two connected sectors that continued to drive core sector growth were coal and electricity. For February 2024, coal output growth grew at 11.59% while electricity generation grew by 6.34%. The demand for coal and electricity had peaked a couple of months and after a short lull, they continue to drive the infrastructure output with their combined weightage of over 30% in the core sector basket. Steel and Cement, the pillars of the visible infrastructure, also grew at robust levels of 8.44% and 10.20% respectively on the back of a sharp revival in construction and infrastructure project demand. These two sectors contribute over 23% to the weight of the core sector basket.

The segment of the core sector that surprisingly flattered the overall infrastructure growth in February 2024 was the hydrocarbons space, comprising of crude oil, refining and natural gas. While crude oil and natural gas surprised with 7.88% and 11.26%  respectively; the heavyweight refining was sober at 2.63%. However, hydrocarbons with a weight of 45% did have a dominantly positive impact on the core sector numbers. The only disappointment in the core sector was fertilizers which contracted by -9.51%, but that was expected as the demand for fertilizers tends to be cyclical and tapers with the end of the Kharif and Rabi sowing and harvesting seasons.

HIGH FREQUENCY CORE SECTOR GROWTH (FEBRUARY 2024)

The yoy growth captures point-to-point growth, but misses out on high frequency trends. That is captured in the MOM numbers in the shaded column below; and the trend was exactly the opposite of the YOY trend. That is where high frequency data (MOM) growth in core sector comes in handy; to capture short term trends. What do we take away from the reading of the high frequency core sector growth for February 2024?

Core Sector Component	Weight	Feb-24 (YOY) %	Feb-24 (MOM) %	FY24 Cumulative (%) #
Coal	10.3335	+11.59%	-3.11%	+12.13%
Crude Oil	8.9833	+7.88%	-6.83%	+0.48%
Natural Gas	6.8768	+11.26%	-6.07%	+6.04%
Refinery Products	28.0376	+2.63%	-2.48%	+3.76%
Fertilizers	2.6276	–9.51%	-16.08%	+4.14%
Steel	17.9166	+8.44%	-7.26%	+12.85%
Cement	5.3720	+10.20%	+1.75%	+9.07%
Electricity	19.8530	+6.34%	-6.17%	+6.80%
Core Sector Growth	100.0000	+6.72%	-4.89%	+7.70%

Data Source: DPIIT (* FY24 is 11-months data)

For the month of February 2022, the MOM growth in core sector is negative across 7 out of the 8 sectors, which is the reason MOM core sector basket growth stands at -4.89%. Let us focus on the drivers of the MOM movement in February 2024. The contraction is clearly being driven by all the sectors with most of the heavyweight sectors like coal, electricity, refining, and steel seeing negative growth. The only sector to witness positive MOM growth in February is cement; where demand continues to be robust from the housing sector. Clearly, fertilizers saw the maximum pressure on a yoy basis and also on MOM basis.

CHARTING CORE SECTOR GROWTH – THE 10-YEAR STORY

Here is a quick dekko at the core sector growth over the last decade. From FY13 to FY23, we have pinned full year data. For FY24 data here is 11 months data from April 2023 to February 2024 and that is likely to give an accurate picture of how FY24 will pan out. We also added the comparable 11 months for the last two fiscal years of FY23 and FY22.

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-Feb)	11.05	9.83	-2.57	20.45	9.24	-0.40	18.44	22.33	8.16
2022-23(Apr-Feb)	8.18	15.29	-1.62	1.50	5.17	11.45	8.97	9.76	9.97
2023-24(Apr-Feb)	7.70	12.13	0.48	6.04	3.76	4.14	12.85	9.07	6.80

Data Source: DPIIT (FY2023-24 data is for 10 months)

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

• FY24 growth in the first 11 months is quite impressive at 7.70%, and is only slightly lower than FY23. The FY22 growth at 11.05% for the first 11 months is not exactly comparable since this growth was on the back of a low base in the aftermath of COVID pandemic.
• Here is the most important takeaway from the annualized data. From the pre-COVID levels, the infrastructure output is 24-25% higher and this is after factoring in the negative impact of the pandemic. That means; post pandemic, Indian core sector has bettered pre-COVID average growth rate, thanks to the centre’s infrastructure thrust.
• Over the last 11 years, the average core sector growth has been around 3.62%, so at 7.70% cumulative growth in FY24, the core sector is a good 408 bps above the 10-year average. However, this cumulative growth of 7.70% is lower than the 8.98% of the last 3 years, although we have to make provision for the COVID story of FY22.

That brings us to another question; will the RBI take a cue from the core sector data and look to boost the core sector growth with rate cuts?

CORE SECTOR GROWTH IS ONLY PART OF RBI NARRATIVE

The core sector growth in the coming months will depend on how aggressive the government gets on capex post the elections and the full budget in July. Remember, the government has cut the capex target for FY24 to rein in fiscal deficit to 5.8% in FY24 and further to 5.1% in FY25. If it succeeds in reaching below the glide path of 4.5% fiscal deficit by FY26, then it would have been a worthwhile exercise cutting the edges of capex. The full budget in July will give a better picture of what the government is planning to do on the capex and the infrastructure push front. Regarding the RBI cutting rates, that is unlikely to happen till a new government is in place and the full budget has been presented.

The interim budget has given three clear signals for the market and the economy. Firstly, the government will continue to spend on infrastructure in the current year and the coming years too. Secondly, the government has demonstrated that it is possible to rein in fiscal deficit, without losing out on capex growth. Lastly, the government also wants to test the downstream effects of its capex spending and see how well the trickle down works. The core sector will remain linked to fiscal policy, with the government giving evidence of its commitment to infrastructure capex, the RBI may prefer to focus on price stability.