Jan-22 core sector expands 3.74% on refining and natural gas boost

2 Mar 2022 , 10:34 AM

One quick takeaway from the core sector data of the last 1 year is that it now appears to have settled in a normalized range of 3-4%. Over last 13 months, 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.

Now for the core sector data revisions. Final revisions in core sector growth for Oct-21 marked a 30 bps upgrade from 8.4% to 8.7%. The first revision for Dec-21 raised core sector by 30 bps from 3.8% to 4.1%. If you consider core sector numbers for Jan-22 and compare with Jan-20, it is up 5.05% indicating that core sector is now growing consistently above pre-COVID levels. Feb-22 core sector could improve further on a weak base.

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

Core sector or infrastructure sector is a very critical lead indicator for IIP and GDP growth. That is because 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 and Aug-21 core sector growth built on that. In Sep-21, the 2-year growth was above 5% and in Oct-21, it was closer to 7%. However, in November, core sector tapered to 1.97% on a 2-year basis. In Dec-21, the 2-year growth over pre-COVID levels picked up to 4.24% which has improved to 5.05% in Jan-22 over Jan-20. The assumption, now, is that Fed hawkishness, high crude prices and the Ukraine war do not disrupt growth significantly.

FY22 core sector 200 bps higher than FY20 levels

Core sector growth on a monthly basis is a powerful high-frequency barometer of the evaporating base effect. It adds tremendous value as a momentum indicator. However, a more structural picture becomes evident by comparing the cumulative core sector data of the 10-months of FY22 with the corresponding 10 months of FY20.

The cumulative growth for Apr-Jan 2022 period is pegged at +11.6%. This is against -8.6% contraction in the Apr-Jan 2021 period, which was the COVID peak. Thus, on a pre-COVID basis, core sector is now 2.00% above corresponding 2019-20 levels; representing a 43 bps improvement over the cumulative number as of Dec-21.

An interesting story of the core sector performance as of Jan-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	YOY over Jan-21 (%)	MOM over Dec-20 (%)	Apr-Jan YOY(%)
Coal	10.3335	+8.2%	+6.4%	+10.3%
Crude Oil	8.9833	-2.4%	+0.0%	-2.6%
Natural Gas	6.8768	+11.7%	-1.8%	+21.2%
Refinery Products	28.0376	+3.7%	+1.1%	+9.3%
Fertilizers	2.6276	-2.0%	-4.9%	-0.3%
Steel	17.9166	+2.8%	+1.8%	+19.9%
Cement	5.3720	+13.6%	+4.3%	+24.6%
Electricity	19.8530	+0.50%	+1.5%	+8.5%
Overall Core Sector Growth	100.0000	+3.7%	+2.0%	+11.6%

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 3.7%. Here, 6 out of 8 core sectors are in the positive. While crude has remained in the negative, steel turned around compared to previous month as auto output got back to normal levels.

c) On a yoy basis, the big percentage drivers of growth are cement and natural gas. Clearly, higher natural gas prices have helped improve output while cement has gained from higher housing and infrastructure outlay. Refinery output had the highest net impact.

d) The third column captures high-frequency MOM growth. There was a sharp turnaround in this segment in December compared to November last year. However, that pace of high frequency growth tapered in Jan-22, largely due to negative growth in fertilizers.

e) The last column covers cumulative data for the first 10 months of FY22. In Nov-21, cumulative data was 108 basis points above the corresponding FY20 levels. This growth improved to 157 basis points in Dec-21 and now to 200 basis points in Jan-22.

f) There are two positive inferences. Firstly, the long term secular trend is turning positive. Secondly, the short term impact of Omicron in Nov-21 has been more or less neutralized in Dec-21 and Jan-22. However, the Ukraine and oil situation remain an overhang.

What core sector growth will India end up with for FY22

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-Jan FY22
Core Sector Growth (%)	-6.4%	11.6%

Data Source: DPIIT

The first 10 months of FY22 look impressive at +11.6%, but that effect is gradually waning and is likely to wane further by Mar-22. In the remaining 2 months of FY22, if core sector sustains the median 3-4% growth, then the overall core sector output would be just back above the March 2019 levels. That would mean nearly 3 years of overall core sector basket going nowhere, but the recovery from the COVID lows is still commendable.

For now it looks like the Omicron scare has been managed. However, there are fresh risks to core sector growth. Higher oil prices and weak rupee are likely to put pressure. In addition, the ongoing geopolitical risks arising from the Russia-Ukraine standoff could be another challenge. The last 2 months of FY22 could be fairly interesting.