Core sector growth for Nov 2011: Infra revival or high base effect?

The Ministry of Commerce and Industry released the core sector growth numbers on Monday, Nov 26, 2011, which remained the highest in the last 4 months. The core sectors group grew by 6.8% in Nov 2011 as compared to the 0.3% growth in Oct 2011. The higher growth in Nov 2011 is apparently largely because of the revival seen in the infrastructure-driven sectors like cement, steel, and electricity production, which grew by 16.6%, 5.1% and 14.1% respectively. However, the growth could also be due to the low base of 3.7% in the same month last year.

The index of eight core sectors, i.e. coal, crude oil, natural gas, petroleum, fertilisers, steel, cement and electricity have a combined weight of 37.90% in the Index of Industrial Production (IIP). The cumulative growth of the core sectors between Apr-Nov 2011 was at 4.6%, as compared to the growth of 5.6% in same period last year.

Refineries and coal grew by 11.2% and 4.9% respectively. The 4.9% growth in coal production has come as the biggest positive indicator out of this data, as this is the first expansion after 3 straight months of contraction.

The higher growth in the cement sector is an indication of the revival of the infrastructural demand in the country. However, when we look at the production numbers released by the Cement Manufacturers' Association, we see a low base effect playing a larger role in the growth rate for Nov 2011. The production of cement in Nov 2011 stood at 14 MT against 11.76 MT in same period last year.

Steel production (weight: 6.68%) had a decent growth rate of 5.1% in Nov 2011 against its 7.6% growth in Nov 2010. Steel production grew at a same rate of 8.2% during the months Apr-Nov in 2010-11 and in 2011-12. However, if we look at the consumption numbers from Apr-Nov 2011, the growth has remain muted at 3.9% due to the slowdown in the economy. Also, it has been seen in past that the demand for steel and GDP growth are related to each other. Therefore, we believe that with a slowing economy, the demand for steel is likely to remain muted in the current fiscal year.

On the other hand, sectors like crude oil, natural gas and fertilisers contracted by -5.6%, -10.1% and -2.4% respectively in Nov 2011.

Overall, higher growth in the core sectors spurs positive growth in the IIP numbers for Nov 2011, which had contracted by -5.1% in Oct 2011.Therefore, the question is, going by the latest growth numbers, with inflation cooling off slowly and interest rates peaking out, are we really seeing some sort of revival in the economy, or it is just the low base effect that is making things look positive?

We believe that the growth in coming months will remain muted, as it will take some time for the economy to revive from the current slowdown. Also, it would be interesting to see the growth figures for Dec 2011, as there was a higher base of 6.4% in the same month last year. As per media reports, the Deputy Chairman of the Planning Commission, Montek Singh Ahluwalia, said that he expects the index of 8 core industries to grow by 4.5%-5% in the next 3-4 months as compared to the growth of 0.3% in Oct 2011.