Core sector growth comes in higher for FY22 at 5.8%

5paisa Research Team 5paisa Research Team 12th December 2022 - 11:23 pm

Core sector growth for Feb-22 came in sharply higher at 5.8%, but that needs to be taken with a pinch of sale. That is because the corresponding YoY core sector growth was -3.3% in Feb-21 which magnified the impact of core sector growth in the current year.

The good news is that in the last 13 months, core sector growth was positive in 12 months. After Sep-21, base effect is neutralized, so core sector growth is more representative.

One interesting signal of the core sector is the direction of the revisions. For Nov-21, the final revised core sector growth came in 10 bps higher at 3.2%. Even the first revision for Jan-22 raised the core sector growth by 30 bps to 4.0%.

Also, the core sector growth on a 2-year basis is up 2.31% showing that the COVID impact is finally diminishing. The positive revisions also bode well for the future changes to the Feb-22 core sector numbers.

How does core sector FY22 compare with core sector FY20?

That is the key issue as it removes the base effect. Monthly core sector growth is useful as a high-frequency barometer but then the extent of vulnerability to the base effect is quite high.

To get a more structural picture, it is essential to look at the cumulative core sector data of the 11-months of FY22 and then compare it with the corresponding 11 months of FY20. This does two things; it is cumulative and it is also over the pre-COVID period.

Let us now look at the numbers. The cumulative core sector growth for Apr-Feb 2022 was +11.0%, but this is on a low base because core sector had contracted -8.1% in the first 11 months of FY21.

Thus, if you look at the data on a pre-COVID basis, then core sector is now 2.01% above corresponding 2019-20 levels. This is almost exactly where we had seen the cumulative figure at the end of Jan-22, so the long term core sector is stabilizing.

Not just the core sector basket, but look at the components

Here is a quick break-up of the core sector based on 3 different approaches.

Core Sector Component	Weight	Feb-22 over Feb-21 (%)	MOM over Jan-22 (%)	Apr-Feb YOY (%)
Coal	10.3335	+6.6%	-0.0%	+9.8%
Crude Oil	8.9833	-2.2%	-9.5%	-2.6%
Natural Gas	6.8768	+12.5%	-9.1%	+20.5%
Refinery Products	28.0376	+8.8%	-8.0%	+9.2%
Fertilizers	2.6276	-1.4%	-11.1%	-0.4%
Steel	17.9166	+5.7%	-5.2%	+18.4%
Cement	5.3720	+5.0%	-4.4%	+22.4%
Electricity	19.8530	+4.0%	-3.3%	+8.1%
Overall Core Sector Growth	100.0000	+5.8%	-5.3%	+11.0%

_{Data Source: DPIIT}

There are 4 important takeaways from the table above.

1) On a YoY basis, the Feb-22 core sector growth is up 5.8%. Here, 6 out of 8 core sectors are have shown positive growth. While crude has been in the negative for some time, fertilizers have come under pressure due to supply chain and input constraints.

2) What has driven core sector growth. What matters is the high weighted sectors. From that perspective, refining and steel contribute substantially due to their weight followed by natural gas and cement. Robust natural gas prices have been a secular story.

3) There is some disappointment on the high-frequency MOM growth. For the first time since Nov-21, this MOM growth is negative due to the combined impact of the war situation in Ukraine and the unprecedented surge in crude oil prices globally.

4) What do we infer from this tabular data. Despite the base effect, 2 year growth appears to be positive and stable. However, the momentum indicator shows pressure and, going ahead, a lot will predicate on how interest rates and inflation pan out.