February 2023 core sector still impressive at 6.0%, despite weak crude

3 Apr 2023 , 09:51 AM

The core sector (also called infrastructure sector) is a collection of 8 fundamental building blocks in the economy and is reported with a lag of one month. Core sector in India comprises of 8 building blocks viz. coal, crude oil, refinery products, natural gas, fertilizers, steel, cement, and electricity. Significantly, core sector basket accounts for 40.27% of the overall IIP basket, and is an important lead indicator of manufacturing GDP.

Core sector data is yoy data, so some impact of the base effect is inevitable. For instance, in October 2022, the core sector growth had dipped below 1%, but has since recovered. For February 2023, the core sector growth stood at 6.0%, despite a healthy base growth of 5.9% in February 2022. Let us look at the revisions. The first revision for January 2023 raised core sector growth by 110 bps from 7.8% to 8.9%. The final revision for November 2022 pegged core sector growth 30 bps higher from 5.40% to 5.70%. Global pressures may be still there, but they are surely softening.

Months	Overall (%)	Coal (%)	Crude Oil (%)	Natural Gas (%)	Refinery (%)	Fertilizers   (%)	Steel  (%)	Cement (%)	Electricity   (%)
Feb-22	5.9	6.6	-2.2	12.5	8.8	-1.4	5.6	4.2	4.5
Mar-22	4.8	0.3	-3.4	7.6	6.1	15.3	4.1	9.0	6.1
Apr-22	9.5	30.1	-0.9	6.4	9.2	8.8	2.5	7.4	11.8
May-22	19.3	33.5	4.6	7.0	16.7	22.9	15.1	26.2	23.5
Jun-22	13.1	32.1	-1.7	1.2	15.1	8.2	3.3	19.7	16.5
Jul-22	4.8	11.4	-3.8	-0.3	6.2	6.2	7.5	0.7	2.3
Aug-22	4.2	7.7	-3.3	-0.9	7.0	11.9	5.8	2.1	1.4
Sep-22	8.3	12.1	-2.3	-1.7	6.6	11.8	7.7	12.4	11.6
Oct-22	0.7	3.8	-2.2	-4.2	-3.1	5.4	5.8	-4.2	1.2
Nov-22	5.7	12.3	-1.1	-0.7	-9.3	6.4	11.5	29.1	12.7
Dec-22	7.0	12.2	-1.2	2.6	3.7	7.3	6.3	9.5	10.4
Jan-23	8.9	13.4	-1.1	5.3	4.5	17.9	10.8	4.6	12.7
Feb-23	6.0	8.5	-4.9	3.2	3.3	22.2	6.9	7.3	7.6

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

The table above is a quick, yet detailed, analysis of the overall core sector growth trend between February 2022 and February 2023. The 3 major drivers of IIP growth in February 2023 are fertilizers at 22.2%, coal production at 8.5% and electricity at 7.6%. In addition, cement growth at 7.3% and steel growth at 6.9% are indicative of a surge in housing demand and infrastructure spending by the government. Through the last one year, crude oil has been under pressure, which is due to ageing wells resulting in lower production. In the recent months, weak crude prices also impacted the domestic oil output. The remaining 7 core sector components showed positive growth in Feb-23.

February 2023 – What led growth and what lagged?

Like in the previous 2 months, February 2023 also saw 7 out of 8 core sectors in the green. In February 2023, it was once again the crude oil segment that saw negative growth; steeply negative at -4.9%. ONGC is taking urgent steps to boost output but weak crude prices will be an overhang. The impact of the output expansion measures of ONGC and Oil India will only be visible in the medium to long term. 

Let us look at the leaders. In terms of percentage growth, fertilizers at 22.2% led the way as the favourable fertilizer policy and efforts to reduce fertilizer imports, triggered a surge in fertilizer output. That is good news for Kharif this year. In terms of heavyweight sectors, it is coal, electricity and steel that had the maximum impact with coal sector output growing at 8.5% and Electricity at 7.6% Power demand is already at all-time highs and now thermal power plants are being supported by adequate coal supplies.

Among other important gainers, steel grew 6.9% on higher export demand while cement saw growth of 7.3% on the back of strong infrastructure and construction demand. Refinery products also saw growth of 3.3% in February 2023 on the back of stable gross refining margins (GRM) compared to recent lows. Lower crude prices and the Russia effect have helped stabilize the GRMs and that is showing in refinery output.

How does high frequency story look like in February 2023?

Till this point, we have been largely focusing on the yoy growth in core sector. While that is the popular benchmark, it is too vulnerable to the base effect. Here we look at the high frequency data indicator as captured by the MOM core sector growth.

Core Sector Component	Weight	Feb-23 (YOY) %	Feb-23 (MOM) %	FY23 Cumulative (%) *
Coal	10.3335	+8.5%	-4.5%	+15.2%
Crude Oil	8.9833	-4.9%	-13.0%	-1.6%
Natural Gas	6.8768	+5.2%	-10.9%	+1.5%
Refinery Products	28.0376	+3.3%	-9.1%	+5.2%
Fertilizers	2.6276	+22.2%	-7.8%	+11.5%
Steel	17.9166	+6.9%	-8.7%	+7.5%
Cement	5.3720	+7.3%	–2.5%	+9.7%
Electricity	19.8530	+7.6%	-7.2%	+9.9%
Core Sector Growth	100.0000	+6.0%	-7.8%	+7.8%

Data Source: DPIIT (* FY23 is Apr-Feb)

In a sense, the MOM core sector has contracted by -7.8%. This MOM contraction comes after 3 consecutive months of high frequency growth. This could be a combination of a sudden spike in hawkish language of the central banks as well as fears of a global slowdown. These concerns are best reflected in high frequency data. The March number could also reflect the financial sector turmoil, so that should be an interesting data point.

How did core sector fare in the last 10 years

Here is how core sector growth has panned out over last 10 years.

Months	Overall (%)	Coal (%)	Crude Oil (%)	Natural Gas (%)	Refinery (%)	Fertilizers   (%)	Steel  (%)	Cement (%)	Electricity   (%)
2012-13(Apr-Mar)	3.8	3.2	-0.6	-14.4	7.2	-3.3	7.9	7.5	4.0
2013-14(Apr-Mar)	2.6	1.0	-0.2	-12.9	1.4	1.5	7.3	3.7	6.1
2014-15(Apr-Mar)	4.9	8.0	-0.9	-5.3	0.2	1.3	5.1	5.9	14.8
2015-16(Apr-Mar)	3.0	4.8	-1.4	-4.7	4.9	7.0	-1.3	4.6	5.7
2016-17(Apr-Mar)	4.8	3.2	-2.5	-1.0	4.9	0.2	10.7	-1.2	5.8
2017-18(Apr-Mar)	4.3	2.6	-0.9	2.9	4.6	0.03	5.6	6.3	5.3
2018-19(Apr-Mar)	4.4	7.4	-4.1	0.8	3.1	0.3	5.1	13.3	5.2
2019-20(Apr-Mar)	0.4	-0.4	-5.9	-5.6	0.2	2.7	3.4	-0.9	0.9
2020-21(Apr-Mar)	-6.4	-1.9	-5.2	-8.2	-11.2	1.7	-8.7	-10.8	-0.5
2021-22(Apr-Mar)	10.4	8.5	-2.6	19.2	8.9	0.7	16.9	20.8	8.0
2020-21(Apr-Feb)	-8.1	-2.2	-5.4	-9.9	-12.2	2.2	-11.8	-14.9	-2.4
2021-22(Apr-Feb)	11.1	9.8	-2.6	20.5	9.2	-0.4	18.4	22.3	8.2
2022-23(Apr-Feb)	7.8	15.2	-1.6	1.5	5.2	11.5	7.5	9.7	9.9

Data Source: DPIIT 

The above table has annual data for the last 10 years and for ensuring apples to apples comparison, the 11 months data of the last 3 years has also been considered. If you leave out the 10.4% growth in core sector in FY22 (largely due to negative base effect), the current year core sector growth is the best in last 10 years, despite a relatively strong base. That is an outcome of government thrust on infrastructure at policy level.

As of the close of February 2023, the 11-month data for FY23 shows core sector growth marginally tapering from around 7.9% to 7.8%. If we look at the comparable 11-month period for the last 3 years, then FY22 has merely been a bounce from the COVID lows. In comparison, FY23 growth in core sector comes on an elevated base and represents genuine accretion in output. This is despite headwinds like central bank hawkishness, runaway inflation, recession concerns, financial sector turmoil and supply chain constraints. It could be a hint that the IIP and GDP growth could improve in the coming months.