Core Sector growth for July 2022 tapers to 4.5%

Core sector, or the Infrastructure sector growth, always has a special place in the list of macros due to its strong externalities. For the month of July 2022 (core sector is announced with a lag of one month), the core sector growth at 4.5% was lower than 13.2% reported in June 2022 and 19.3% reported in May 2022. The fall has been steady but that is more due to the waning of the base effect from the Omicron lows last year. For instance, the 4.5% core sector growth in July 2022 has come on a fairly high base of 9.9%. That is still commendable.  

While yoy core sector growth is still strong, it is the sequential MOM growth in the core sector that is under pressure. That is a signal of high frequency pressure on core sector growth, but we will come back to that later. There have been some positive revisions of previous core sector numbers. For instance, April 2022 core sector final revisions took core sector growth up by 110 bps from 8.4% to 9.5%. The first revision of June 2022 has also taken the core sector growth higher by 50 bps from 12.7% to 13.2%. 

In July 2022, 6 out of 8 infrastructure sectors were in the green while crude oil and natural gas showing negative growth. Coal output led the way with 11.4% growth on robust power demand. Refinery products grew 6.2% on the back of healthy GRMs while fertilizes also grew at the same rate on the back of supportive subsidies. Steel gained 5.7% on gradual removal of export duties. In relative terms, cement and electricity growth for the month of July 2022 were subdued at 2.1% and 2.2% respectively.

High frequency growth disappointed, but not so bad after all 

The table below captures the 8-sector break up of core sector. This growth has been captured on a yoy basis and also on a high frequency MOM basis. 
 

Much has been discussed about the yoy growth, so we will not dwell too much on that. Our focus here will be on the high frequency MOM growth in core sector output. Why is MOM growth important. Unlike the yoy growth, the MOM is high frequency data point and not too vulnerable to the base effect. The core sector growth was negative on MOM basis in July 2022, but the contraction was not as bad as in June 2022. The good news was that despite the numerous headwinds, 4 out of 8 core sectors showed positive high frequency growth.

Let us just spend a moment on the granular details of this MOM core sector growth. If you dig into the data a little deeper, the July 2022 situation is not as bad as June. For instance, in July, 4 out of the 8 core sectors have shown positive growth on MOM basis, while in June only 2 out of 8 showed positive growth. To an extent, the negative impact of electricity and coal on MOM basis has been quite intense, which resulted in negative overall contraction of -2.3% in the high frequency MOM core sector growth.

To sum up the core sector story, the cumulative core sector growth in the first 4 months of FY23 at 11.5% is better than FY22. The challenge in the coming months would be handling the downstream impact of supply chain bottlenecks, high inflation, uncertain oil supply and ultra-hawkish monetary policy. Global slowdown in growth has been mitigated, but not obviated. In the months ahead, the rupee could have a bearing on imported inflation. Overall, it looks like the MOM core sector growth may witness pressure in coming months.