CORE SECTOR GROWTH REBOUNDS INTO POSITIVE AT +2.04%
If the previous month of August 2024 was disappointing with the core sector growth in negative territory, the month of September saw a turnaround back to positive territory. In fact, the August 2024, core sector growth had dipped into negative after a gap of 42 months. The last time there was negative core sector growth was way back in February 2021, when core sector output had contracted by -3.3%. However, that was more due to the COVID resurgence in early 2021. In fact, during the period from 2019 to 2021, there were several months that had seen negative core sector output. This was on account of widespread shutdowns in factories and businesses across India leading to negative core sector growth. However, if you exclude the pandemic months, the last time that India had witnessed core sector contraction in normal times was in April 2015. That means the core sector contraction of -1.58% (revised lower from -1.77%) in August 2024, was the first normal period contraction in the last 9 years. Now, that was some story!
The good news is that core sector growth turned around into positive territory in September at 2.04%, but if one were to look at the previous revisions, then the picture is largely mixed. The first revision of the August 2024 core sector upped the figure by 19 basis points from a negative figure of -1.77% to -1.58%. At the same time, the final revision of June 2024 core sector growth saw a downgrade of 13 basis points from 5.13% to 5.00%. In short, the revisions are mixed and it would be tough to extrapolate any trend for September. One good thing is that the core sector growth has turned around into positive in September, but it is tough to say if it is flash in the pan or if it is sustainable in the coming months.
CORE SECTOR LEADERS AND LAGGARDS IN SEPTEMBER 2024
The core sector comprises of 8 infrastructure baskets and each of these baskets have a weightage; with refinery products having the highest weightage of 28.04%, followed by electricity at 19.85% and steel at 17.92%. In the month of September 2024, out of these 3 sectors, only electricity gave negative returns while steel and refinery products gave positive returns. In fact, the sharp spike in refinery output growth in September was largely responsible for the core sector turning around into positive. If you look at the core sector data for September 2024, crude oil output, natural gas production and electricity output saw contraction; while the other 5 sectors saw positive growth. Here it must be mentioned that the core sector basket has 40.27% weight in the IIP basket, so the core sector impacts IIP growth and GDP growth due to its secondary effects.
For September 2024, the expanding core sectors outnumbered the contraction core sectors by a ratio of 5:3. The 5 sectors that showed positive core sector growth in September 2024 included; Cement at 7.10%, Refinery Products at 5.76%, Coal at 5.64%, Fertilizers at 1.89%, and Steel at 1.46%. Among losing sectors were Crude Oil at -3.87%, Natural Gas at -1.30%, Electricity at -0.49%. The sectors with negative growth showing core sector contraction had a combined weight of 35.7% in the overall core sector basket, while the gaining sectors had a weight of 64.3%; obviously pushing the overall core sector growth into positive territory.
CORE SECTOR AVERAGES OVER LAST ONE YEAR
One way to get a proper perspective of the latest month core sector data is to look at the one year averages to see if the current figure is underperforming or outperforming the averages. The overall core sector growth in the last one year has averaged around 6.33% in the 12 months prior September 2024, which is quite positive. Among the major drivers were coal output at 9.85%, natural gas at 5.68%, steel output at 9.00%, cement at 3.92% and electricity generation at 7.99%. These were the big drivers in terms of the positive shift in core sector growth. Among the laggards, crude oil output at 0.14% and fertilizers at 1.32% proved to be a drag on core sector growth. The core sector with the highest weightage (Refinery Products), grew at a modest average of 2.89%.
BREAKING DOWN THE SEPTEMBER 2024 CORE SECTOR GROWTH
The table below captures the breakdown of the +2.04% core sector growth for September 2024 into the 8 components. Out of the 8 core sectors, 5 sectors (Coal, Refinery Products, Fertilizers, Steel, and Cement) reported positive core sector growth while the other 3 sectors (Crude oil, natural gas, and electricity) reported negative core sector growth. While the gaining sectors averaged 3.77% growth in the core sector, losing sector averaged -1.89% contraction over the last 12 months prior to September 2024. One must not forget that the base effect also played a role. The comparable base moved down 13.37% in August 2023 to 9.45% in September 2023, partly justifying the expansion in the core sector growth. However, it is still not clear if the apprehensions pertaining to the likely impact of reduced government capex on core sector is real?
Months | Overall (%) | Coal (%) | Crude (%) | Natural Gas (%) | Refinery (%) | Fertilizers (%) | Steel (%) | Cement (%) | Electricity (%) |
Sep-23 | 9.45 | 16.00 | -0.40 | 6.52 | 5.49 | 4.17 | 14.81 | 4.73 | 9.87 |
Oct-23 | 12.68 | 18.38 | 1.29 | 10.00 | 4.29 | 5.33 | 13.59 | 16.95 | 20.38 |
Nov-23 | 7.89 | 10.87 | -0.40 | 7.52 | 12.36 | 3.33 | 9.74 | -4.75 | 5.76 |
Dec-23 | 5.08 | 10.79 | -1.02 | 6.71 | 4.09 | 5.85 | 8.28 | 3.84 | 1.23 |
Jan-24 | 4.16 | 10.57 | 0.64 | 5.45 | -4.30 | -0.59 | 9.17 | 4.06 | 5.68 |
Feb-24 | 7.06 | 11.57 | 7.93 | 11.19 | 2.63 | -9.50 | 9.44 | 7.82 | 7.59 |
Mar-24 | 6.25 | 8.70 | 2.07 | 6.30 | 1.59 | -1.27 | 7.53 | 10.58 | 8.62 |
Apr-24 | 6.94 | 7.51 | 1.73 | 8.56 | 3.92 | -0.76 | 9.83 | 0.16 | 10.24 |
May-24 | 6.86 | 10.20 | -1.14 | 7.51 | 0.50 | -1.66 | 8.94 | -0.63 | 13.74 |
Jun-24 | 5.00 | 14.78 | -2.62 | 3.27 | -1.54 | 2.45 | 6.31 | 1.79 | 8.58 |
Jul-24 | 6.14 | 6.82 | -2.92 | -1.27 | 6.62 | 5.31 | 6.42 | 5.48 | 7.94 |
Aug-24 | -1.58 | -8.05 | -3.44 | -3.61 | -1.03 | 3.15 | 3.88 | -3.02 | -3.72 |
Sep-24 | 2.04 | 2.64 | -3.87 | -1.30 | 5.76 | 1.89 | 1.46 | 7.10 | -0.49 |
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 September 2023 to September 2024. The positive momentum that had been assiduously sustained since March 2023 appear to have been visibly disrupted in August 2024 with the core sector growth contracting. It is still too early to say if the current month is really an expansion of core sector output, sans the base effect. The slowdown in the core sector growth in FY25 is more apparent if we compare with the first half of previous fiscal years. While the core sector in H1FY23 was at a robust 9.75%, in H1FY24, it was still very healthy at 8.20%. However, the first half H1FY25 has seen the cumulative core sector growth fall sharply to 4.21%; worsened by the performance in the last couple of months. The pressure of lower capex spending growth by the government in FY25 appears to be manifesting.
Out of the 8 core sectors in September 2024, a total of 5 sectors showed yoy positive growth traction while 3 sectors showed negative growth momentum. Let us look at the positive growth sectors first. Cement output expanded by 7.10% while Refinery Products output expanded by 5.76% on a yoy basis in September 2024. These were the two major drivers of core sector output in September followed by Coal at 2.64%. The expansion in cement output was more a mark that monsoon slowdown had come to an end and the construction and infrastructure demand was back in full swing. Many refineries had been hit by supply delays, West Asia disruptions, and routine maintenance work in July and August. That is now getting back to normal territory. The household demand for electricity is weak but then the demand from industry is picking up. On the downside, crude oil and natural gas have been hit by policy delays and limited investments in enhancing output.
The portents for core sector are, however, fairly reasonable. With the monsoons turning in at 107.6% of long period average (LPA), as per the IMD, Kharif output is likely to show good traction. That will result in a revival in rural demand, although higher rural inflation remains a big challenge. Meanwhile, the latest quarter results indicate that urban demand has taken a hit and that is not great news for core sector output. One must admit that the full budget on July 23, disappointed the street by not expanding the capex growth from 11.1%, despite the cushion of a ₹2.11 Trillion RBI dividend distribution for the fiscal year. The government will have to figure out if it was a good decision, in retrospect, to focus less on capex growth and more on fiscal deficit control. For now, the government will stick to fiscal prudence.
HIGH FREQUENCY CORE SECTOR GROWTH (SEPTEMBER 2024)
The yoy growth 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. Here is the high frequency MOM data; which captures the high frequency data more powerfully
Core Sector Component | Weight | Sep-24 (YOY) % | Sep-24 (MOM) % | FY25 Cumulative (%) # |
Coal | 10.3335 | +2.64% | +13.60% | +5.88% |
Crude Oil | 8.9833 | -3.87% | -3.70% | -2.05% |
Natural Gas | 6.8768 | -1.30% | -1.60% | +1.97% |
Refinery Products | 28.0376 | +5.76% | +0.10% | +2.31% |
Fertilizers | 2.6276 | +1.89% | -2.70% | +1.75% |
Steel | 17.9166 | +1.46% | -4.80% | +6.10% |
Cement | 5.3720 | +7.10% | +1.50% | +1.65% |
Electricity | 19.8530 | -0.49% | -7.40% | +5.86% |
Core Sector Growth | 100.0000 | +2.04% | -1.30% | +4.21% |
Data Source: DPIIT (# FY25 is 6-months data)
There has been enough discussion on the September 2024 yoy core sector growth and the cumulative core sector growth for FY25. Hence we will focus more on the MOM high frequency growth in core sector. In July 2024 the MOM core sector growth at -0.85% was relatively subdued. However, it further deepened to -4.18% in August 2024. September 2024 is the third consecutive month it has stayed in the negative on MOM basis. If you look at the MOM growth in the 8 core sectors, 5 have shown negative growth, with only Coal and Cement decisively in the positive. This could be an interest space to watch out for.
CHARTING LONG TERM STORY OF CORE SECTOR GROWTH
Here is a quick take on the core sector growth over last 12 financial years from FY13 to FY24. In addition, for a better comparison, we have also provided 6-month (Apr-Sep) cumulative data for 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 | 1.61 | 4.83 | 11.32 | 9.26 | 8.71 | 8.89 |
2023-24(Apr-Mar) | 7.61 | 11.76 | 0.61 | 6.05 | 3.56 | 3.71 | 12.54 | 8.86 | 7.06 |
2022-23(Apr-Sep) | 9.75 | 20.98 | -1.27 | 1.84 | 10.11 | 11.49 | 6.91 | 11.03 | 10.77 |
2023-24(Apr-Sep) | 8.20 | 12.18 | -0.39 | 4.30 | 3.96 | 6.96 | 15.91 | 11.56 | 6.09 |
2024-25(Apr-Sep) | 4.21 | 5.88 | -2.05 | 1.97 | 2.31 | 1.75 | 6.10 | 1.65 | 5.86 |
Data Source: DPIIT (FY2024-25 data is for 6 months)
Here are the major takeaways from the core sector data trends in the last decade.
In the last 3 years, the core sector growth has substantially benefited from the post-pandemic recovery coupled with the higher capex allocation by the government. Now, both appear to be saturating. For instance, in FY23 and FY24; capex allocations in the budget grew by 30% yoy, while in FY25 it grew by s meagre 11.1%. The RBI has not ventured into rate cuts even in the October meet, but the current indicators could coax the RBI to favour rate cuts, sooner rather than later.
WILL THE RBI MAKE UP FOR LOWER CAPEX WITH RATE CUTS?
The RBI did not do that in October, so the expectation is that the RBI would more aggressive over the next two policy statements in December and February. Remember, the Fed has already for the jugular with a 50 bps rate cut. Now, the ball is in RBI’s court on whether to implement rate cuts immediately or wait for longer. For FY25, capex was maintained at ₹11.11 Trillion; showing yoy growth of just 11%.
While the fiscal deficit was cut further to 4.9% of GDP for FY25, it looks like the reduced capex allocation had an impact on core sector output. One way the RBI can make up for this gap is though a symbolic rate cut in the December 2024 policy; without waiting till February 2025. This will reduce the funding cost and make infrastructure financing a lot simpler. It remains to be seen whether the RBI will buy the infrastructure argument when the MPC meets for its last meeting of the calendar year in December 2024.
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