January 2023 core sector buoyed to 7.75% by fertilizers, coal and power

1 Mar 2023 , 09:29 AM

The core sector, which is a collection of 8 infrastructure sectors in the economy; is reported with a lag of one month. Typically, the core sector comprises of coal, crude oil, refinery products, natural gas, fertilizers, steel, cement and electricity. It has a special importance, since the core sector basket accounts for nearly 40.27% of the overall IIP basket.

However, the importance of the core sector is not just about the weightage, but also that it acts as a lead indicator for the IIP and GDP numbers. The core sector growth had dipped to below 1% levels in October 2022, but has since picked up momentum and traction. Let us also look at some revisions. First revision for December 2022 lowered core sector growth by 44 bps from 7.40% to 6.96%. Final revision for October 2022 has pegged core sector growth 17 bps lower from 0.90% to 0.73%. Clearly, the pressures from global headwinds, weak exports and high cost of funds is showing up on core sector revisions.

Months	Overall (%)	Coal (%)	Crude Oil (%)	Natural Gas (%)	Refinery (%)	Fertilizers   (%)	Steel  (%)	Cement (%)	Electricity   (%)
Jan-22	4.03	8.19	-2.37	11.67	3.72	-1.99	3.81	14.12	0.85
Feb-22	5.85	6.64	-2.17	12.53	8.81	-1.39	5.58	4.23	4.51
Mar-22	4.76	0.26	-3.37	7.60	6.07	15.29	4.13	8.96	6.10
Apr-22	9.53	30.15	-0.94	6.38	9.19	8.79	2.52	7.43	11.81
May-22	19.34	33.46	4.60	6.99	16.67	22.94	15.10	26.21	23.45
Jun-22	13.13	32.07	-1.71	1.25	15.06	8.20	3.33	19.73	16.49
Jul-22	4.77	11.37	-3.76	-0.30	6.23	6.23	7.48	0.70	2.32
Aug-22	4.21	7.65	-3.33	-0.87	7.03	11.86	5.81	2.15	1.37
Sep-22	8.30	12.06	-2.33	-1.70	6.60	11.78	7.67	12.44	11.58
Oct-22	0.73	3.80	-2.20	-4.24	-3.10	5.42	5.76	-4.16	1.19
Nov-22	5.72	12.19	-1.08	-0.67	-9.30	6.37	11.69	28.95	12.71
Dec-22	6.96	12.22	-1.16	2.60	3.69	7.25	6.27	9.51	10.39
Jan-23	7.75	13.43	-1.06	5.27	4.54	17.91	6.24	4.65	12.03

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

The table above is a comprehensive analysis of the overall core sector growth trend between January 2022 and January 2023. If you look at the 3 major drivers of IIP growth in January 2023, it is fertilizers at 17.91%, coal production at 13.43% and electricity at 12.03%. Fertilizers has a much lower weightage, but coal and electricity have a combined weight of over 30% and hence have been significant boosters of the core sector growth in January 2023. Also, through the last one year, in most months, crude oil has been under pressure, which is largely due to the ageing wells resulting in lower production. Natural gas output also got impacted, but that is now back to normal, once pricing issues were sorted out.

 

January 2023 – Core sectors leaders and laggards

Like in December 2022, even in January 2023, a total of 7 out of 8 core sectors were in the green. In January 2023, it was once again the crude oil segment that saw negative growth. Of course, ONGC is taking urgent steps to boost production but the results would only be out in the medium to long term and not in the short term. Other than crude oil, all the other core sectors saw positive traction on growth. 

Coal output maintained consistent growth, thanks to Coal India getting aggressive on production and enhanced output from captive coal mines. Coal sector output growth for December 2022 grew at a healthy clip of 13.43%. Electricity (thermal and renewable) gained from adequate coal supplies and grew 12.03% in the month. The surprise package was fertilizes which saw 17.91% growth on favourable domestic fertilizer policy by the centre.

Among other important gainers, steel grew 6.24% on higher export demand, natural gas grew 5.27% on the back of better pricing support while cement saw growth of 4.65% on the back of strong infrastructure and construction demand. Refinery products also saw growth of 4.54% in January 2023 on the back of strong gross refining margins (GRM).

High frequency growth story of core sector in January 2023

The routine core sector growth is captured yoy i.e. Jan-23 over Jan-22. However, the yoy figure is vulnerable to base effect. It also does not capture short term, high frequency trends in core sector. That gap is filled by the sequential core sector growth, which in this case would be Jan-23 over Dec-22.

Core Sector Component	Weight	Jan-23 (YOY) %	Jan-23 (MOM) %	FY23 Cumulative (%) *
Coal	10.3335	+13.435%	+7.59%	+16.08%
Crude Oil	8.9833	-1.06%	+0.16%	-1.32%
Natural Gas	6.8768	+5.27%	+0.88%	+1.36%
Refinery Products	28.0376	+4.54%	+1.90%	+5.35%
Fertilizers	2.6276	+17.91%	+4.53%	+10.48%
Steel	17.9166	+6.24%	+2.67%	+7.12%
Cement	5.3720	+4.65%	-0.12%	+9.99%
Electricity	19.8530	+12.03%	+3.43%	+10.08%
Core Sector Growth	100.0000	+7.75%	+2.95%	+7.91%

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

The high frequency sector has bene overall positive for the third month in a row, which clearly shows that the growth momentum of infrastructure is recovering quite rapidly. That is largely thanks to favourable policy and the government taking the initiative on spending on infrastructure. If you look at high frequency core sector growth, it is 2.95% for January 2023, with only cement marginally in the negative and all the other 7 core sectors clearly in the positive. It is not just the structural growth, but even momentum looks to be favourable.

Look back at how core sector fared since 2013

Here is a time-series evaluation of the core sector growth over last 10 years.

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
2020-21(Apr-Jan)	-8.64	-1.88	-5.60	-10.66	-12.36	2.76	-13.20	-16.58	-2.67
2021-22(Apr-Jan)	11.61	10.26	-2.60	21.22	9.29	-0.31	19.94	24.72	8.52
2022-23(Apr-Jan)	7.91	16.08	-1.32	1.36	5.35	10.48	7.12	9.99	10.08

Data Source: DPIIT 

The above table has annual data for the last 10 years and for ensuring apples to apples comparison, the 10 months data of the last 3 years has also been taken into account. If you leave out the 10.41% growth in core sector in FY22 (largely due to negative base effect), the current year core sector growth promises to be the best in the last 10 years. That is a direct outcome of the government thrust on infrastructure at a policy and investment level.

As of the close of January 2023, the 10-month data for FY23 shows core sector growth marginally tapering from around 8% to 7.91%. If we look at the comparable 10-month period for the last 3 years, then FY22 has been a bounce from the COVID lows. In comparison, FY23 growth in core sector comes on a much more elevated base, which is what makes it impressive. This is despite headwinds like central bank hawkishness, runaway inflation, recession concerns and supply chain constraints etc. It only means that IIP and GDP growth could improve going ahead.