Nov-21 core sector expands 3.1% as crude oil and cement drag

3 Jan 2022 , 09:29 AM

If you look at the core sector graphic over the last 13 months, the core sector growth has been positive in 11 out of the 13 months. Of course, the core sector growth between Mar-21 to Aug-21 was slightly misleading as it looks optically high due to a low base. Post September, that base effect has got neutralized, so growth is more sustainable now.

Meanwhile, final revisions in core sector growth for Aug-21 marked a substantial upgrade from 11.6% to 12.2%. At the same time, the first revision for Oct-21 raised the core sector growth sharply from 7.5% to 8.4%. The good news is on the 2-year growth front. If you consider the core sector number for Nov-21 and compare with Nov-19, then core sector is actually up 1.97% indicating that COVID impact on growth may have been neutralized.

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

Core or infrastructure sector acts as a lead indicator for IIP and GDP growth. That is largely because it has a weightage of 40.27% in IIP growth. If you look back at a 2-year comparison of 2021 over 2019, Jul-21 was the first month when core sector was above Jul-19 levels and Aug-21 numbers 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 growth tapered to 1.97% on a 2-year basis, but this marks the fifth month in succession of growth above 2019 levels.

FY22 core sector 108 bps above FY20 levels

Core sector growth on a monthly basis is a lot more reflective of the current situation and the evaporating base effect, so it adds value as a momentum indicator. But we still need to understand if the pain of COVID has been overcome on a cumulative basis. For that the data of the first 8 months of FY22 can be compared to the first 8 months of FY20.

The cumulative growth for Apr-Nov 2021 period is pegged at +13.7%. This is against -11.1% contraction in the Apr-Nov 2020 period, which was the COVID peak. That means, on a pre-COVID basis, core sector is now 1.08% above corresponding 2019 levels.

How the 8 core sectors fared; yoy and sequentially

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 Nov-20 (%)	MOM over Oct-21 (%)	Apr-Nov YOY(%)
Coal	10.3335	+8.2%	+6.3%	+11.6%
Crude Oil	8.9833	-2.2%	-3.3%	-2.7%
Natural Gas	6.8768	+23.7%	-5.4%	+22.8%
Refinery Products	28.0376	+4.3%	+3.5%	+10.6%
Fertilizers	2.6276	+2.5%	-1.2%	-0.6%
Steel	17.9166	+0.8%	-5.0%	+25.3%
Cement	5.3720	-3.2%	-21.1%	+28.3%
Electricity	19.8530	+1.58%	-12.1%	+10.2%
Overall Core Sector Growth	100.0000	+3.1%	-4.1%	+13.7%

Data Source: DPIIT

Here are some important takeaways from the table above.

a) The first column is the weightage column which tells you how much a change in particular component can have on the overall core sector number. Refinery products, electricity and steel have an inordinately high combined weight of over 65%.

b) The second column is  break-up of yoy core sector growth of 3.1%. Here, 6 out of 8 core sectors are in the positive. Crude and steel were hit by tepid demand in the light of downstream cuts. Natural gas has been the big gainer on favourable pricing.

c) The third column captures high-frequency sequential growth. We have a problem here as high frequency growth is negative. The surge in Omicron cases in India has resulted in a sudden loss of momentum with 6 out of the 8 core sectors lagging.

d) The last column covers cumulative data for the first 8 months of FY22. Last month, cumulative data was 60 basis points above the corresponding FY20 levels. This month, that 2-year growth has improved to 108 basis points.

e) The moral of the story is there is good news on the long term indicators, but short term momentum has been missed due to a surge in Omicron. That is the problem point.

What is the best case scenario for FY-2022?

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-Nov FY22
Core Sector Growth (%)	-6.4%	13.7%

Data Source: DPIIT

The first 8 months of FY22 look impressive at 13.7%, but that has a lot of base effect in it and the high frequency momentum is gradually waning. In the remaining 4 months of FY22, core sector must grow over 7% to bring the core sector output back to Apr-2019 levels. But, that would only mean that core sector would be back to where it was 3 years back.

A lot depends on how the Indian economy navigates the Omicron virus, global hawkishness and rising inflation. Unless core sector grows, the multiplier effect will not work.