Jun-24 core sector eases to 3.95% on higher base effect

2 Aug 2024 , 09:48 AM

CORE SECTOR GROWTH TAPERS TO 3.95% IN JUNE 2024

The monthly core sector growth for June 2024 fell sharply to 3.95%, which is sharply lower than the core sector growth for March, April, and May 2024. In all these months, the core sector growth was above 6%. To an extent, this fall in the core sector growth was on account of a higher base effect, but we will come back to that later. Firstly, let us quickly look at why the core sector is so critical in from the macroeconomic analysis point of view. The core sector captures the output growth of 8 of the most important infrastructure sectors that form the building blocks of the economy. These 8 pillars of the core sector basket include; coal output, crude oil, refinery products, natural gas, fertilizers, steel, cement, and electricity.

Each of these have a weightage and refinery products has the highest weightage of 28.04% in the core sector basket. For June, the refinery output was negative and that pulled down the overall core sector growth. Another interesting fact is that the core sector basket is about 40.27% of the IIP basket, so it impacts growth also due to its secondary effects. For June 2024, it coal output that led the way with 14.75% growth followed by electricity at 7.68%. The other significant contributors to the core sector growth in June 2024 were natural gas at 3.29%, steel at 2.69%, and fertilizers at 2.45%. Two out of the eight core sectors reported yoy contraction in June 2024. From the hydrocarbon subset, oil extraction and refinery products saw negative growth on a yoy basis. The base year core sector saw a spike of around 320 basis points, leading to sharply lower core sector growth in June 2024.

CORE SECTOR AVERAGE 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 7.62%, which is quite positive. Among the major drivers were coal output at 12.69%, natural gas at 7.67%, steel output at 10.17%, cement at 5.88% and electricity generation at 9.50%. These were the big drivers in terms of the shifts in the core sector growth. Among the laggards, crude oil output at 1.02% and fertilizers at 1.04% proved to be the major 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 May 2024 raised core sector growth by 4 bps from 6.28% to 6.32%. The final revision for March 2024 upped core sector growth by just 26 basis point from 6.00% to 6.26%. This bodes well for June 2024 numbers; as it increases the prospects  of the June core sector number also being upgraded; although the growth in the base number could limit any meaningful upsides on revision.

BREAKING DOWN THE JUNE 2024 CORE SECTOR GROWTH

The table below captures the breakdown of the 3.95% core sector growth for June 2024 into the 8 components. Out of the 8 core sectors, 2 sectors (crude oil and refinery products) reported negative core sector growth while the other 6 sectors reported positive growth. The ratio has come under pressure in June due to election related uncertainty as well as a sharply higher base effect, slowing the core sector growth.

Months	Overall (%)	Coal (%)	Crude (%)	Natural Gas (%)	Refinery (%)	Fertilizers  (%)	Steel  (%)	Cement (%)	Electricity  (%)
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	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	6.67	7.49	1.67	8.53	3.92	-0.78	8.78	-0.46	10.23
May-24	6.32	10.22	-1.12	7.46	0.48	-1.68	6.73	-0.61	13.75
Jun-24	3.95	14.75	-2.64	3.29	-1.56	2.45	2.69	1.88	7.68

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 June 2023 to June 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. That is true of the latest month (June 2024) core sector growth also. In fact, June 2024 saw the lowest core sector growth in the last one year. However, in the last one year, there were two months of double digit core sector growth and five months of above 8% growth. That explains why the full year core sector growth stood at a robust level of 7.60% for FY24; and that momentum has continued in FY25 also. However, it must be said that as of date, the core sector growth in the first three months has averaged just 5.65%. One reason for the lower core sector growth in the current month compared to the previous month is the higher base effect by 320 bps. However, it remains to be seen if revisions make a difference.

Out of the 8 core sectors in June 2024, 6 sectors showed yoy positive growth traction while 2 sectors showed negative growth momentum. Crude oil output contracted by -2.64% yoy, and refinery products also contracted -1.56% yoy in June 2024. All these can be attributed to delays in decision making on account of the elections. In the case of refinery products, there is a more fundamental reason. Refinery products have a weight of 28.04% in the core sector basket, so the contraction of -1.56% in June 2024 actually turned out to be a major dampener overall. This was largely on account of the lower than expected gross refining margins (GRM) in the last quarter. That was also evident in the profitability of the oil refining companies in India in the June 2024 quarter.

With the monsoons normalizing and the Kharif sowing picking up momentum, the production of fertilizers has turned around. The higher minimum support price (MSP) offered to farmers has also helped to boost demand for fertilizers. The full budget presented by the government on July 23, 2024 has been fairly friendly to agriculture and industry, although it has maintained the capex outlay at ₹11.11 Trillion, the same level as in the interim budget. The government was expecting a boost to the capex outlay due to the bumper RBI dividend, but that was utilized to push fiscal deficit down by 20 bps to 4.9%.

HIGH FREQUENCY CORE SECTOR GROWTH (JUNE 2024)

The yoy growth, that we have seen till now, captures point-to-point growth effectively, but misses out on high frequency 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. Here is what we read from the MOM data.

Core Sector Component	Weight	Jun-24 (YOY) %	Jun-24 (MOM) %	FY25 Cumulative (%) #
Coal	10.3335	+14.75%	+0.92%	+10.87%
Crude Oil	8.9833	-2.64%	-4.49%	-0.65%
Natural Gas	6.8768	+3.29%	-3.68%	+6.41%
Refinery Products	28.0376	-1.56%	-5.43%	+0.88%
Fertilizers	2.6276	+2.45%	-4.40%	+0.00%
Steel	17.9166	+2.69%	-4.09%	+6.04%
Cement	5.3720	+1.88%	+4.25%	+0.31%
Electricity	19.8530	+7.68%	-3.62%	+10.57%
Core Sector Growth	100.0000	+3.95%	-3.17%	+5.68%

Data Source: DPIIT (# FY25 is 3-months data)

In May 2024, the core sector growth had shown some signs of recovery after a sharp fall in April. However, that trend reversed and the high frequency core sector growth again turned into negative zone in June 2024. For the month of June 2024, the MOM growth in core sector was positive in just 2 out of the 8 core sectors, which is the reason MOM core sector basket shows -3.17% contraction. The positive impact on high frequency core sector growth was restricted to coal and cement. All the other components showed negative MOM growth in June 2024, with crude oil, refinery products, steel and fertilizers falling more than -4%.

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 3-month (Apr-Jun) 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-Jun)	13.90	31.90	0.60	4.80	13.50	13.30	6.90	17.20	17.10
2023-24(Apr-Jun)	6.00	8.70	-2.00	0.10	1.90	11.20	16.50	12.70	1.30
2024-25(Apr-Jun)	5.70	10.80	-0.70	6.40	0.90	0.00	6.10	0.30	10.50

Data Source: DPIIT (FY2024-25 data is for 3 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%. The FY22 growth at 10.41% was on the back of the tepid pandemic base. FY24 is on a very high base after 2 successive years of frenetic growth in core sector output.
• From the pre-COVID levels, infrastructure output is 20% 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 positive takeaway.
• Over the last 12 full fiscal years, the average core sector growth has been around 3.96%, so at 7.60% full-year growth in FY24; and 5.70% in YTD growth in FY25, India seems to be certainly better off on the infrastructure front.

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%. That is a lot of capex momentum to keep the core sector number ticking.

DID THE FULL BUDGET DISAPPOINT ON CORE SECTOR SUPPORT?

When the Finance minister presented the full budget on July 23, 2024, there were expectations that the government would push its capex investment higher and bring it on par with the growth in the previous two fiscal years. However, that was not to be as the capex was maintained at ₹11.11 Trillion. One would have logically expected that with the bumper RBI dividend of ₹2.11 Trillion paid to the government, it would have been used to partially reduce the fiscal deficit and partially boost capex. However, while the government did reduce the fiscal deficit target for FY25 from 5.1% of GDP to 4.9% of GDP, the capex was left untouched.

The logic of the government, apparently, is that the government has done its bit and now the private sector should come forward and fill the gaps in capex. That has already started as is evident from the overflowing order books of the capital goods companies. Probably, this is also a signal that that the RBI would look at rate cuts, sooner rather than later. If the repo rates are brought back to the pre-pandemic levels of 5.15%, then it should automatically give a boost to private sector participation in capex. If that happens, then it becomes a dual advantage for the Indian economy. We have to wait and watch!