December core sector at 3 month high of 7.4%

Core sector bounces in Dec-22, revisions favourable

On the last working day of January 2023, the Office of the Economic Advisor announced core sector growth for December 2022; that is a normal lag of 1-month data. Core sector comprising of 8 critical infrastructure sectors viz. coal, oil extraction, oil refining, natural gas, fertilizers, steel, cement and electricity. 

Core sector constitutes nearly 40.27% of the IIP basket and is a key lead indicator for the GDP growth too; especially the industrial component. Core sector has bounced to a level of 7.4% in December 2022. An important driver of core sector growth is revisions for previous months. First revision for November 2022 has raised growth by 30 bps from 5.4% to 5.7%. Final revision for September 2022 has pegged core sector growth 50 bps higher from 7.8% to 8.3%. That is positive indicator.

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

The core sector, being a YoY number, has benefited from a lower base. However, progressively, the base is likely to increase and that benefit could subside in coming months.

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December 2022 – core sector leaders and laggards

In December 2022, a total of 7 out of 8 core sectors were in the green; a clear improvement over the last two months. Which was the only sector to show negative traction in the month of December 2022? It was crude oil that contracted by -1.2% in the month of December. Other than crude oil, all the other core sectors saw positive traction on growth. Let us now turn to the much larger list of positive gainers in the core sector basket. 

Coal output has maintained consistent growth, thanks to Coal India getting aggressive on production and enhanced output from captive coal mines. Coal sector output growth for December 2022 grew at a healthy clip of 11.5%. Electricity (thermal and renewable) gained from adequate coal supplies and grew 10.0% in the month. 

Among other big gainers, steel grew 9.2% on higher export demand, cement grew 9.1% on infrastructure demand while solid subsidy support and lower input costs led to fertilizers growing 7.2%. Natural gas and refinery products also saw good growth. Overall, the base effect of last year did help, but the recovery in the macro economy is real.

Here is the high-frequency story of core sector

The routine core sector growth is always captured on a YoY basis i.e. Dec-22 over Dec-21. However, the problem is that the YoY figure is vulnerable to base effect and does not capture the short term and high frequency trends in core sector. That is done by the sequential core sector growth, which in this case would be Dec-22 over Nov-22.

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

The YoY growth and the cumulative growth in December 2022 have been along expected lines. The big positive surprise is the sharp recovery in the high frequency MOM growth in core sector at 9.2%. This comes after almost 2 months of virtual stagnation in the MOM numbers. The bounce has not only been decisive on a high frequency basis, but it clearly indicates that the short term trends in growth are turning favourable for the Indian infrastructure. That is good news as infrastructure has strong externalities.

In the previous month, 6 out of 8 sectors had shown negative MOM growth in core sector. However, the overall number was still flat due to the strong bounce in coal and cement. In December 2022, the 9.2% growth in MOM core sector is positive across the board. The core sector on a sequential basis is not just impressive but also broad-based. That is indicative of an all-round recovery in the core infrastructure sectors, with the promise of strong externalities across the board.

How core sector fared since FY13

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

Data Source: DPIIT 

As of the close of December 2022, the 9-month data for FY23 shows core sector growth at 8%; the same level as last month. 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 to date, is a lot more reflective of a practical scenario. What is perhaps appreciable is that the FY23 core sector growth has come despite headwinds like central bank hawkishness, runaway inflation, recession concerns, supply chain constraints etc. The core sector data gives hope that IIP and GDP growth could meet or better the projections in the Economy Survey 2022-23.