India's core sector impresses at 8.2% in June 2023

What exactly is core sector and why it matters

Each month, on the last working day, the Department for Promotion of Industry, and Internal Trade (DPIIT) announces the core sector numbers for the previous month. On July 31, 2023, the DPIIT announced the core sector numbers for the month of June. Core sector growth for June 2023 came in at an impressive 8.2%, but we will come back to that later. What exactly does the core sector growth really mean? In a nutshell, the core sector is a barometer of infrastructure growth in India. Here infrastructure has been dividend into 8 critical sectors that form the backbone of the economy. 

The 8 sectors are coal, crude oil, refinery products, natural gas, fertilizers, steel, cement, and electricity. There are 2 reasons why the core sector growth is very critical from a macro standpoint. Firstly, it must be remembered that the core sector basket accounts for 40.27% of overall IIP (index of industrial production). So, if IIP has to grow then it is essential that core sector also grow. Secondly, many of the core sectors like steel, cement, power, and natural gas have strong externalities, in that, they have a multiplier effect on GDP growth. 

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Monthly core sector growth over last 1 year

The table below captures the monthly core sector growth numbers in the shaded column. Remember, these are reported monthly but are annualized core sector growth rates.

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

It needs no reiteration that the month of June 2023 has been decisively positive for the core sector and it has also shown a quantum recovery from lower levels. Out of the 8 core sectors, only the crude oil extraction sector showed negative with the other 7 core sectors showing positive growth. This resulted in the overall core sector growth for the month of June 2023 coming in sharply higher at 8.2%.

In the month of June, the core sector growth has been driven higher by steel, cement, and coal production; all having strong multiplier effect on IIP and GDP. But, more than the core sector growth, the positive trend is that even the revisions of previous months have been on the upside. Each month core sector data is subject to a first revision after a month and a final revision after 3 months. The first revision for May 2023 upgraded core sector growth by 70 bps from 4.3% to 5.0%. At the same time, the final revision for March 2023 upped core sector growth by 60 bps from 3.6% to 4.2%. This raises hopes for future months too.

Core sector leaders and laggards for June 2023

For the month of June 2023, a total of 7 out of 8 core sectors showed positive growth with only the crude oil extraction sector showing negative growth. Here are some important inferences we can draw. 

• The reason, the crude oil output fell -0.6% in June 2023 is a problem that has been carried forwards for a number of months and even years. Ageing wells and limited capacity coming on stream are resulting in much lower domestic production.
   
• Let us turn to the big gainers in the core sector. There was cement at 21.9%, coal at 9.8% and cement at 9.4%. They were the big gainers in June. Both cement and steel have been logical beneficiaries of the government boost to infrastructure capex. Coal has been a direct beneficiary of thermal plants operating at peak capacity in summer. 
   
• There was moderate growth in refinery output at 4.6% on the back of robust gross refining margins (GRMs) and easy availability of crude. Natural gas output grew by 3.6% and fertilizers grew by 3.4%; both being the key beneficiaries of favourable government policies. Above all, power output grew 3.3% amidst peak demand in summer.

What is important is that this growth came on a very strong base.

Is long term core sector growth on track?

Till now, we have focused too much on the core sector in the short term. Let us finally take a longer-term perspective of core sector growth over the last 10-12 years. Here is how it looks including the components of core sector.

Data Source: DPIIT (FY2023-24 data is for 3 months)

The good news is that the annualized quarterly core sector growth for FY24 is higher than the median core sector growth over the last 12 fiscal years. There is something more important. From pre-COVID levels of infrastructure output, the core sector is 18% higher, despite the negative shock in the COVID year. In short, post-pandemic, Indian core sector has bettered the pre-COVID average growth rate.

In the last 11 years till FY23, average core sector growth was 3.6%. So, the latest annualized core sector growth of 5.8% cumulative growth in FY24 is certainly flattering. The capital investment cycle is starting to look up and the government focus on infrastructure is giving the added thrust. It looks like the infrastructure pegs are finally falling in place.