Jul-24 core sector bounces to 6.12% as refinery products surge

2 Sep 2024 , 03:18 PM

CORE SECTOR GROWTH BOUNCES TO 6.12% IN JULY 2024

The monthly core sector growth for July 2024 showed a sharp bounce to 6.12%. It may be recollected that the June core sector had come in sharply lower at 3.95% due to the base effect. However, the first revision of the June core sector upped the figure by 115 bps from 3.95% to 5.10%. That is a very sharp upgrade. However, the July 2024 core sector growth at 6.12% is much better even than the upgraded infrastructure sector growth of June 2024. This also opens up the gates for further upgrades of the July 2024 core sector too.

In June 2024, economists had expressed concerns that the sharp fall in core sector output was due to the government cutting down on capex growth from 30% to 11%. However, that does not seem to be the case, if one considers the core sector rebound in July 2024 to 6.12%. But, why is core sector data so critical? It captures the output growth of 8 basic infrastructure sectors forming the building blocks of the economy. These 8 pillars are; coal output, crude oil, refinery products, natural gas, fertilizers, steel, cement, and electricity.

CORE SECTOR LEADERS AND LAGGARDS IN JULY 2024

Each of these infrastructure baskets have a weightage and refinery products has the highest weightage of 28.04% in the core sector basket, followed by electricity at 19.85% and steel at 17.92%. In the month of July 2024, these 3 sectors showed strong growth traction, one of the reasons, the growth in the core sector was so robust in the month. Unlike June 2024, when the refinery output was negative; the month of July saw all the 4 heavyweight core sectors viz., coal production, electricity, refinery products and steel display very strong and positive traction of over 6% and that was instrumental in the rebound in the core sector.

Another interesting fact is the core sector basket is about 40.27% of the IIP basket, so it impacts IIP and GDP growth due to its secondary effects. For July 2024, steel led the way with 7.19% growth followed by electricity at 7.02%, coal production at 6.82% and refinery products at 6.63%. These 4 gaining core sectors had a combined weight of 76.14% in the core basket, which explains the sharp rally in the core sector growth in July 2024. Two out of the eight core sectors reported yoy contraction in July 2024; both from the hydrocarbons sector. Crude oil output contracted by -2.89% and natural gas output contracted by -1.32%.

CORE SECTOR AVERAGES AND CORE SECTOR REVISIONS

Before we get into the core sector revisions, let us quickly look at how the core sector components have averaged over the last 1 year in terms of output growth. The overall core sector in the last one year has averaged around 7.74%, which is quite positive. Among the major drivers were coal output at 12.69%, natural gas at 7.67%, steel output at 10.59%, cement at 5.94% and electricity generation at 9.57%. These were the big drivers in terms of the positive shift in core sector growth. Among the laggards, crude oil output at 1.02% and fertilizers at 1.04% proved to be a drag on the core sector growth. The core sector with the highest weightage (Refinery Products), grew at a modest average of 3.51%.

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 June 2024 raised core sector growth by 115 bps from 3.95% to 5.10%. The final revision for April 2024 upped core sector growth by 26 basis point from 6.67% to 6.93%. This bodes well for July 2024 numbers; as it increases the possibility that the July core sector number also gets upgraded; although the growth in the base number normally also plays a key role here.

BREAKING DOWN THE JULY 2024 CORE SECTOR GROWTH

The table below captures the breakdown of the 6.12% core sector growth for July 2024 into the 8 components. Out of the 8 core sectors, 2 sectors (crude oil and natural gas) reported negative core sector growth while the other 6 sectors reported positive growth. Higher base effect is starting to play a role in the core sector growth momentum.

Months	Overall (%)	Coal (%)	Crude (%)	Natural Gas (%)	Refinery (%)	Fertilizers (%)	Steel (%)	Cement (%)	Electricity (%)
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	5.05	10.75	-1.03	6.59	4.04	5.85	8.28	3.81	1.23
Jan-24	4.13	10.57	0.70	5.52	-4.29	-0.56	9.19	4.04	5.67
Feb-24	7.09	11.61	7.89	11.26	2.64	-9.51	9.41	7.83	7.60
Mar-24	6.26	8.72	2.05	6.36	1.57	-1.29	7.52	10.56	8.63
Apr-24	6.93	7.49	1.67	8.53	3.92	-0.78	9.82	0.16	10.23
May-24	6.32	10.22	-1.12	7.46	0.48	-1.68	6.73	-0.61	13.75
Jun-24	5.10	14.75	-2.64	3.29	-1.56	2.45	6.71	1.88	8.56
Jul-24	6.07	6.82	-2.89	-1.32	6.63	5.34	7.19	5.50	7.02

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 July 2023 to July 2024. The positive momentum has been sustained since March 2023; barring some minor aberrations in the trend; which were largely on account of the base effect. However, upgrades like we saw for the June data is positive signal. In fact, June 2024 saw the lowest core sector growth in the last one year as per the original estimate of 3.95%, but was later revised upwards to 5.10%; making it more in line with the averages. However, in the last one year, there were 2 months of double digit core sector growth and 6 months of above 7% growth. That explains why the full year core sector growth stood at a robust level of 7.60% for FY24. That momentum has continued into FY25 also; although the higher base is surely having an impact. However, it must be said that as of date, the core sector growth in the first 4 months has averaged a relatively healthy 6.11%. One thing is clear; the much feared impact of lower capex growth on core sector output growth appears to be illusory.

Out of the 8 core sectors in July 2024, 6 sectors showed yoy positive growth traction while 2 sectors showed negative growth momentum. Crude oil output contracted by -2.89% yoy, and natural gas also contracted -1.32% yoy in July 2024. All these can be attributed to delays in decision making as a lag effect of the elections. In the case of refinery products, there was a sharp bounce back as crude supplies stabilized and the gross refining margins (GRM) also stabilized at more lucrative levels for the oil refiners. Refinery products have a weight of 28.04% in the core sector basket, so the positive growth of 6.63% in July 2024 actually has a major magnifying impact on the core sector growth. The unique thing about July 2024 is that, the above 6% growth was not just in refinery products, but across steel, electricity, and coal; and these 4 sectors account for over 76% of the core sector weightage.

With the monsoons normalizing and the Kharif sowing picking up momentum, a lot will depend on how the agriculture growth picks up and how rural demand is able to support higher infrastructure spending. While the higher MSP will surely make a difference, the full picture of the monsoons output on agriculture will only be visible after we get to see the Rabi data also by the end of this year. One area where the core sector growth was disappointed by the full budget of July 2024 was the slower than expected growth in infrastructure spending. The higher dividend of ₹2.11 Trillion as dividend from RBI was allocated towards reducing the fiscal deficit, rather than in boosting infrastructure capex.

HIGH FREQUENCY CORE SECTOR GROWTH (JULY 2024)

The yoy growth, that we have seen above, captures point-to-point growth effectively, but misses out on high frequency trends. These are the short term trends. That is because yoy growth is too sensitive to the base effect. That is why, we also look at the high frequency MOM data also; which captures the real high frequency fluctuations in output. Here is what we read from the MOM core sector growth data.

Core Sector Component	Weight	Jul-24 (YOY) %	Jul-24 (MOM) %	FY25 Cumulative (%) #
Coal	10.3335	+6.82%	-12.55%	+10.87%
Crude Oil	8.9833	-2.89%	+2.96%	-0.65%
Natural Gas	6.8768	-1.32%	+2.90%	+6.41%
Refinery Products	28.0376	+6.63%	+6.86%	+0.88%
Fertilizers	2.6276	+5.34%	+3.58%	+0.00%
Steel	17.9166	+7.19%	+0.34%	+6.04%
Cement	5.3720	+5.50%	-11.83%	+0.31%
Electricity	19.8530	+7.02%	-2.02%	+10.57%
Core Sector Growth	100.0000	+6.07%	-0.85%	+6.10%

Data Source: DPIIT (# FY25 is 4-months data)

In June 2024, the core sector growth had shown negative MOM growth traction of -3.17%. The trend of high frequency growth continued to be negative in July 2024 also, although the figure was more subdued at -0.85%. If you look at the MOM growth in the 8 core sectors, 3 have shown negative growth, with cement and coal showing rather deep double-digit MOM cuts while the fall in electricity was more modest. The other 5 components showed positive MOM core sector traction with refinery products displaying the best short term growth momentum among all the core sector components for the month of July 2024.

CHARTING CORE SECTOR GROWTH – LONG TERM STORY

Here is a quick take on the core sector growth over the last 12 financial years from FY13 to FY24. In addition, for a better comparison, we have also provided 4-month (Apr-Jul) cumulative data for the last 3 fiscal 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
2022-23(Apr-Mar)	7.80	14.84	-1.72	1.60	4.82	11.31	9.26	8.70	8.89
2023-24(Apr-Mar)	7.60	11.80	0.60	6.10	3.60	3.70	12.50	8.90	7.10
2022-23(Apr-Jul)	11.50	26.60	-0.50	3.50	11.70	11.30	7.00	12.90	13.10
2023-24(Apr-Jul)	6.60	10.10	-1.00	2.30	2.30	9.10	16.10	11.30	2.90
2024-25(Apr-Jul)	6.12	9.88	-1.26	4.35	2.33	1.35	7.62	1.60	9.87

Data Source: DPIIT (FY2024-25 data is for 4 months)

Here are the major takeaways from the core sector data trends in the last decade.

• FY24 growth was impressive at an upgraded 7.60%, and only slightly lower than FY23 at 7.80%; despite a much higher base. The FY22 growth at 10.41% was on the back of the tepid pandemic base and hence not comparable. FY24 is on a very high base after 2 successive years of frenetic growth in core sector output; making it actually appreciable.
  
• From the pre-COVID levels, infrastructure output is 22.3% higher and this is after factoring in the negative impact of the pandemic. In short; post-pandemic, Indian core sector has bettered pre-COVID average growth rate; which is a big positive takeaway.
  
• Over the last 12 full fiscal years, the average core sector growth has been around 3.96%, so at 6.12% annualized growth in the first 4 months of FY25; the Indian infrastructure sector surely looks in fine fettle and putting up its best show of the decade.

In the last 3 years, the decisive uptick in the core sector growth has not only come from the post-pandemic recovery, but also the higher capex allocation by the government. In FY23 and FY24; the capex allocations in the budget grew by 30% while in FY25 it has grown by 11.1%. That is a lot of cumulative capex momentum to keep the core sector growth ticking.

LOWER CAPEX GROWTH IS OK; BUT RATE CUTS WILL HELP

When the Finance minister presented the full budget on July 23, 2024, there were strong hopes that she would push capex investment higher. Even if not 30%, the hope was that the growth would, at least, be raised from a few percentage points. However, the capex was maintained at ₹11.11 Trillion. Instead, the government decided to deploy the special dividend of ₹2.11 Trillion paid by the RBI to the government for funding its food subsidy program and for reducing the fiscal deficit further to 4.9% of GDP from 5.1% of GDP as projected in the interim budget. The capex was left largely untouched.

Can you hold that against the government? Not exactly. Two years of 30% plus growth in capex is substantial momentum and the lag effect itself should last for about 4-5 years. In a sense, the government is right that it needs to sit back and take stock of where all the capex is going. Also, the government now wants the private sector to come forward and fill the gaps in capex. Probably, this also signals a likely rate cut by the RBI, but we have to wait and watch. One hope is that the repo rates would be brought back to pre-pandemic levels of 5.15%; which would be a big boost to private sector capex spending.