Core Sector Growth Rises to 5.4 per cent in November 2022

Sectors That Led and Sectors That Lagged in November 2022

On the last working day of December 2022, the Office of the Economic Advisor announced the core sector growth numbers for the month of November 2022. The Core sector or Infrastructure growth is announced each month with a 1-month lag. The core sector, comprising 8 critical infrastructure sectors, accounts for 40.27% of the IIP basket and is a key lead indicator for IIP and GDP growth. Core sector growth had previously dipped from 7.8% in September 2022 to 0.90% in October 2022. However, in a sense of relief, the core sector growth for November 2022 has bounced back to 5.4%, with traction across sectors. The good news is that the base effect will continue to be supportive.

A good barometer of how future data will pan out is the revisions to previous core sector numbers. The first revision in core sector growth for October 2022 has seen a sharp upgrade of 80  basis points from 0.10% to 0.90%. The final revision for August 2022 is an upgrade of 10 bps from 4.10% to 4.20%. However, for August 2022, if both the upgrades are added up, then the total upgrade is to the tune of 90 basis points. That is a positive indicator.

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

The core sector covers 8 of the most important infrastructure sectors of the Indian economy, comprising of coal sector, electricity, crude oil, refined products, natural gas, steel, cement and fertilizers. For November 2022, 5 core sectors showed positive growth and 3 showed negative growth.

November 2022 – Sectors that led and sectors that lagged

In November 2022, a total of 5 out of 8 core sectors were in the green; a marginal improvement over October 2022. Let us start with the sectors that showed positive traction in the month. Broadly, the volatility in oil prices and delay in the natural gas pricing policy has resulted in weak growth in the entire hydrocarbon value chain. For instance, crude oil saw -1.1% contraction, refinery products -9.3% contraction and natural gas -0.7% contraction in output for November 2022. In October, cement output had contracted, but this month, that has marked the turnaround in the core sector, as we shall see later.
Let us move on to the core sectors that showed positive traction for the month of November 2022. One sector that has consistently maintained consistent growth is coal output, and that is largely thanks to  Coal India getting aggressive on production as well as the government focusing on enhanced output from captive coal mines. Coal sector output growth for November 2022 was a healthy 12.3%. Higher subsidy support and a fall in price of inputs once again led to a 6.4% growth in fertilizers output for the month. Electricity output also remained robust in November at 12.1%. However, the big thrust came from steel and Cement. With export curbs going away, steel output has bounced back sharply showing 10.8% growth in November 2022. But the big story (despite its relatively lower weight) was the cement sector which grew by an impressive 28.6% in November. Fresh capacities and higher demand, bode well for cement and for construction activity in India.

High frequency core output stays flat for the second month in a row

High frequency core sector growth (unlike the normal yoy growth) is calculated on a month-on-month basis. This is a good short-term measure that captures momentum quite accurately. Core sector had shown negative high frequency momentum between June and September, but had flattened out in April. In November again, the high-frequency growth overall was flat. But a granular picture would give more insights as indicated below.
 

Data Source: DPIIT (* FY23 is Apr-Nov)

The critical data point to watch out for is the fourth column of MOM growth (shaded column), which represents high-frequency growth for November over October. While the YOY figure is influenced by the base effect, the high-frequency MOM growth captures short-term headwinds a lot better. Like in October, even in November 2022, the high-frequency growth is absolutely flat. Here are some key takeaways.

1. The first data column is the weightage column showing the impact that a change in a particular component can have on the overall core sector growth. Refinery products, electricity, Coal and steel have a combined weight of over 75%.
2. The second column is the break-up of YOY core sector growth of 5.4% for November 2022. Here, 5 out of 8 core sectors are in the positive, with hydrocarbons contracting on a YoY basis. Positive thrust came from cement, coal mining, steel, power and fertilizers.
3. The all-important MOM column captures the high-frequency momentum of the infrastructure sector. Interestingly, 6 out of 8 core sectors have shown negative short-term momentum. Only coal output and cement output have shown positive short-term momentum with all other sectors showing negative momentum. The flat MOM growth is slightly deceptive as the actual data could have been a lot worse had it not been for the sterling MOM performance of coal output.

A 10-year view of core sector growth

Here is a time-series evaluation of the core sector growth over the last 10 years.

Data Source: DPIIT 

As of the close of November 2022, there is 8 month of data for FY23, which paints a fairly reliable picture for the full year. For FY22, full-year core sector growth was 10.4%, but that was on a very low base in the post-COVID scenario. The 8.0% in FY23 first eight months is lower than 13.9% in the corresponding period last year. However, FY23 is on a much higher base, which makes the growth a lot more impressive. 

The 8% annualized core sector growth in FY23 is on a more normalized base. More importantly, the FY23 growth in core sector output has come amidst serious headwinds. These include challenges like central bank hawkishness, high levels of inflation, recession concerns, consumer hesitancy, falling operating margins and supply chain constraints. All these factors are hitting core sector output and hopefully, things should improve as the government and the private sector trigger investments. For now, the core sector number so far is prima facie impressive. Sustaining the growth would now predicate on how the RBI takes forward its monetary policy in the months ahead!