March 2024 core sector growth tapers to 5.2%, despite low base effect

2 May 2024 , 03:45 PM

CORE SECTOR GROWTH TEPID AT 5.2% IN MARCH 2024

The core sector or the infrastructure growth is a unique measure of how the 8 core industries are performing on a monthly basis. It is a yoy growth figure, but it is presented on a monthly basis to help understand the trend. The core sector broadly comprises of 8 building blocks of the Indian economy viz. coal output, crude oil, refinery products, natural gas, fertilizers, steel, cement, and electricity. These 8 sub-sectors combine to form the core sector basket and it has a 40.27% weight in the IIP. That is the reason, the core sector sets the tone for the IIP growth and also for overall GDP growth.

Core sector growth is normally reported with a lag of one month, so the March core sector output is reported on the last day of April and so on. Unlike February 2024, when the core sector growth was led by the hydrocarbons segment, this time around the key triggers came from steel, cement, coal, and electricity. Over the last one year, it is coal and electricity that have driven core sector growth. The power sector has been working overtime to meet growing demand and coal sector has been working overtime to feed coal stocks to the power companies. In March 2024, cement led the way with 10.57% growth as construction picked up. Coal output at 8.71% and electricity at 8.00% were also robust while steel and natural gas grew output at over 5% in March 2024. Let us now turn to the FY24 story.

CUMULATIVE CORE SECTOR GROWTH FOR FY24 ROBUST

Along with the monthly core sector numbers, the Office of the Economic Advisor also announced the cumulative core sector growth for FY24. This time, the numbers for full 12 months of FY24; up to end of March 2024 were also announced. For FY24, the core sector growth on a cumulative basis stood at 7.51%. This is slightly lower than the FY23 figure of 7.80%. Overall, the core sector growth in FY23 at 7.8% and in FY24 at 7.51% have been relatively robust. This is lower than FY22 at 10.41%, but that is misleading as it came on the back of a low pandemic base. However, FY24 growth comes on a very solid base of two consecutive years of very strong growth. For FY25, the interim budget has cut government capex growth from 30% to 11.1%. We can expect a positive surprise in the full budget.

A quick word on the downstream impact of robust core sector growth. When the output of steel, cement, oil, or coal grows, the multiplier effect on growth is much greater than 1. That is the big positive about infrastructure growth and that is exactly what the core sector numbers capture. By itself, the infrastructure growth has strong multiplier effects due to the deep externalities it has. Hence when infrastructure grows at 5.20%, the downstream effect would be a multiple of that and that explains why the GDP is growing annually at a rate of nearly 7-8% for 3 years in a row.

CORE SECTOR REVISIONS IN MARCH 2024?

While the core sector acts as an important high frequency indicator of growth, it is also fairly dynamic in nature. 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 February 2024 raised core sector growth by 36 bps from 6.72% to 7.08%. The final revision for December 2023 upped core sector growth by 17 bps from 4.88% to 5.05%. This bodes well for Mar-24 numbers.

Months	Overall (%)	Coal (%)	Crude Oil (%)	Natural Gas (%)	Refinery (%)	Fertilizers  (%)	Steel  (%)	Cement (%)	Electricity  (%)
Mar-23	4.24	11.67	-2.85	2.67	1.54	9.72	12.09	-0.20	-1.57
Apr-23	4.57	9.14	-3.55	-2.86	-1.50	23.54	16.56	12.36	-1.12
May-23	5.23	7.23	-1.94	-0.33	2.78	9.71	11.96	15.92	0.83
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	4.06	10.21	0.70	5.52	-4.34	-0.56	8.67	5.65	5.66
Feb-24	7.08	11.61	7.88	11.26	2.64	-9.51	9.08	9.06	7.54
Mar-24	5.20	8.71	2.02	6.32	-0.27	-1.28	5.50	10.57	8.00

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 March 2023 to March 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 explains why the full year core sector growth stands at a robust level of 7.51%. The core sector numbers of January 2024 and February 2024 have seen upward revisions, which bodes well for March 2024 too. One concern would be that the core sector growth tapered in March, despite a low base, and that could be an impact of slowing capex in Q4FY24.

Out of the 8 core sectors in March 2024, 6 sectors showed yoy positive growth traction in March 2024; with only fertilizers and refinery products showing negative growth. Refinery products have a weight of 28.04% in the core sector basket, so the impact on the core sector number got magnified on the downside in March 2024. Fertilizer weakness came from slackening momentum in output after the end of Rabi season. The drop in capex spending by the government in recent months was also a factor; although overflowing order book positions of capital goods companies is the redeeming factor.

MARCH 2024 – SECTORAL LEADERS AND LAGGARDS

Like in recent months, the 2 connected sectors of coal and electricity continue to drive growth. In FY24, coal output showed average growth of 12.13% and electricity output showed average growth of 7.13%. In terms of average growth for FY24, the other leading lights were cement at 9.24% and Steel at 12.57%. Among the hydrocarbon pack, crude oil was flat at 0.69% average growth in FY24, natural gas did better at 6.08%, while refinery products, with the highest weightage of 28.04% grew at just about 3.6% on an average. Fertilizers is the only space to have shown negative growth in the last 3 consecutive months, a clear indication of the sector being under pressure.

HIGH FREQUENCY CORE SECTOR GROWTH (MARCH 2024)

The yoy growth captures point-to-point growth, but misses out on high frequency trends. That is because the yoy growth is too sensitive to the base effect. Here we additionally look at the high frequency MOM data also. Here is what we read from the MOM data.

Core Sector Component	Weight	Mar-24 (YOY) %	Mar-24 (MOM) %	FY24 Cumulative (%) #
Coal	10.3335	+8.71%	+20.65%	+11.73%
Crude Oil	8.9833	+2.02%	+7.38%	+0.61%
Natural Gas	6.8768	+6.32%	+6.39%	+6.06%
Refinery Products	28.0376	-0.27%	+8.97%	+3.39%
Fertilizers	2.6276	–1.28%	+2.93%	+3.72%
Steel	17.9166	+5.50%	+6.64%	+12.27%
Cement	5.3720	+10.57%	+11.66%	+9.11%
Electricity	19.8530	+8.00%	+8.52%	+7.00%
Core Sector Growth	100.0000	+5.20%	+9.87%	+7.51%

Data Source: DPIIT (* FY24 is full 12-months data)

For the month of March 2022, the MOM growth in core sector was decisively positive in all the 8 core sectors, which is the reason MOM core sector basket growth stands at +9.87%. Let us focus on the drivers of the MOM movement in March 2024 over February 2024. The surge on high frequency basis was led by coal and cement with double digit MOM growth. Barring fertilizers at 2.13% MOM growth, all the other core sectors registered over 6% growth in March 2024 on MOM basis. This appears to be a sharp turnaround in MOM growth and shows that the high frequency trends are still very positive for core sector.

CHARTING CORE SECTOR GROWTH – THE DECADE GONE BY

Here is a quick take on the core sector growth over the last decade. From FY13 to FY23, we have pinned full year data, including for FY24 also.

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)	7.51	11.73	0.61	6.06	3.39	3.72	12.27	9.11	7.00

Data Source: DPIIT (FY2023-24 data is for full 12 months)

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

• FY24 growth is quite impressive at 7.51%, and is only slightly lower than FY23 at 7.80%. The FY22 growth at 10.41% is not exactly comparable since this growth was on the back of a low base in the aftermath of COVID pandemic. FY24 is on a very high base after 2 successive years of frenetic growth in the core sector output.
• Here is the most important takeaway from the annualized data. From the pre-COVID levels, the infrastructure output is 21% higher and this is after factoring in the negative impact of the pandemic. That means; post pandemic, Indian core sector has bettered pre-COVID average growth rate, and that is obvious even if you just cast a cursory glance at the first column of overall growth
• For FY24 overall, the key drivers of core sector growth have been Steel, Coal, Cement and Electricity. While the hydrocarbon segment has been struggling overall, the 6.06% growth in refinery products adds a big thrust to the overall core sector output, especially considering the weightage of 28.04% assigned to refinery products.
• Over the last 11 years, the average core sector growth has been around 3.62%, so at 7.51% cumulative growth in FY24, the core sector is a good 389 bps above the 10-year average. Government infrastructure capex thrust has been the major factor.

That brings us to another question; will the RBI take a cue from the core sector data and look to boost the core sector growth with rate cuts?

CORE SECTOR GROWTH GELS WITH THE BROAD RBI NARRATIVE

India is currently in a state of flux. The general elections are on and a new government will be in place on June 04, 2024. After that, the full budget will be presented in July, and the RBI is unlikely to embark on any monetary action before that. The core sector growth in FY25 will predicate on how aggressive the government gets on capex post the elections and the full budget in July. After all, the government also has a fiscal deficit figure to worry about, and that cannot be allowed to go out of line. The full budget will give a better picture of what the government is planning to do on the capex and the infrastructure push front.

There are several X-factors that the government is going to be up against. There is the uncertainty of elections, and notwithstanding popular projections and predictions; Indian voters have a way of throwing up surprises time and again. That is something most investors have at the back of their minds. There is the chance of another year of weak monsoons, at least, going by the heat wave conditions prevailing and that could restrain capex. Finally, the government may have to direct incentives to exporters in a tough global market. All in all, FY25 core sector growth may be a lot more challenging.