TWO STORIES: FERTILIZERS DISAPPOINT; NATURAL GAS FLATTERS

TWO STORIES: FERTILIZERS DISAPPOINT; NATURAL GAS FLATTERS

Fiscal Year 2026 had some dubious distinctions on core sector. March was the second month in FY26, when core sector contracted. It had first contracted by -0.06% in October 2025 and has now contracted by -0.44% in March 2026. However, 2 sectors stood out. Fertilizers production contracted by -24.6% in March 2026 on yoy basis. This is normally a busy month for fertilizer production, but supply chain constraints created by the US-Iran war led to gas shortfalls. The positive side of this gas flow shortage was that India natural gas output turned positive in March 2026, after contracting for 20 months in a row.

Nearly 74% of the core sector is linked to fossil fuels and so the impact was expected. Natural gas output bounced as India spruced up domestic production amid delayed gas shipments from the Straits of Hormuz. However, coal output, electricity, and crude oil extraction were in the negative, while refinery output flat. Out of the 8 core sectors, 4 sectors showed positive growth while 4 sectors contracted. Even the traditional leaders like steel and cement slowed in March as economic activity got hit by supply chain constraints.

MONTH-WISE CORE SECTOR GROWTH – LAST ONE YEAR

The table captures breakdown of the -0.44% yoy core sector de-growth for March 2026 across 8 infrastructure baskets. Previous data points have been revised, appropriately.

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

The underlying core sector trend is still positive, which is evident from the fact that February 2026 core sector output got upgraded by 49 bps from 2.27% to 2.76%. Refinery products, which has a weight of 28.1% in the core basket, was almost flat in March. Among the other heavyweight sectors; coal and electricity were in the negative while steel was in the positive. However, the momentum in steel and cement was substantially lower in March 2026. In fact, fertilizers and natural gas output for March represented two sides of the same problem. Fertilizer output contracted -24.6% due to disruption in gas supply and other crude-related inputs. However, the push to gas output in India led to a 6.36% expansion in natural gas production. This is the first positive growth for natural gas in last 21 months.

ANNUAL CORE SECTOR NUMBERS: STEADILY TRENDING LOWER

Core sector is reported on a monthly and annual basis. For the full financial year FY26, the cumulative core sector growth at 2.61% is the lowest in the last 5 years.

How does 2.61% compare with core sector growth in last 10 years? If you exclude the exceptional COVID period, this is the lowest core sector growth since FY14. If you look at the 10 years prior to FY26, the average core sector growth was 4.06%. If the exceptional de-growth of COVID year was eliminated, then the average of the remaining period was 5.20%. Either way, the 2.61% in FY26 is starkly lower.

CORE SECTOR OUTPUT – SOME INVESTMENT SIGNALS

The story of core sector in March 2026 was all about the US-Iran war in the Middle East. The stories of Fertilizers and natural gas output in March 2026 reflect the two sides of the crisis. While fertilizers output contracted sharply, domestic natural gas production benefited in a big way. However, it is expected that the war may have created structural challenges for the hydrocarbons segment and the effects are likely to linger well through FY27.

The bigger concern for the industry and the government will be the progressive fall in core sector growth over the last 5 years. The practice of central government transferring capex funds to the states is not working too well. It is probably high time the centre once becomes the nucleus of pushing capex in India. After all, in tough times, it is the central government that needs to take the initiative and ensure that the job actually gets done!