The Weekly Wrap | The best-laid plans often go awry

In this edition, RBI and the government’s fire-fighting measures for growth, tax cuts on fuel, restriction on sugar exports, rising fiscal deficit and the winter in the startup world.


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In 1785, Robert Burns offered an apology to a tiny mouse after accidentally ploughing through its nest. But remorse wasn’t the only feeling the tenant-farmer-turned-excise-collector expressed.


But Mousie, thou art no thy-lane,
In proving foresight may be vain:
The best laid schemes o’ Mice an’ Men
Gang aft agley,
An’ lea’e us nought but grief an’ pain,
For promis’d joy!


In his poem To a Mouse, Scotland’s most famous poet also contemplated on the role fate plays in our lives and how even the best-laid plans often fail to bring us the joy they promised.


Best Laid Plans _ Kuvera weekly update


Why are we talking about a tiny mouse and an 18th century Scottish poet in 21st century India?


Well, because the feelings the poet expresses and the lessons the poem teaches us are timeless.


Consider what has happened over the past few weeks. On May 4, the Reserve Bank of India raised interest rates—just weeks after keeping them unchanged. On May 14, the government banned wheat exports—barely days after forecasting record shipments. On May 21, the government slashed excise duty on petrol and diesel—less than two months after allowing fuel retailers to jack up prices rapidly. A day later, it tinkered with import and export duties on several commodities. And on May 25, the government capped sugar exports—after shipments jumped to a record.


All these fire-fighting measures came because the government and the RBI’s “best-laid” plans to boost economic growth, rein in the fiscal deficit, and control inflation are going astray.



Fuel up


In 2014, the government gave “full freedom” to state-run oil marketing companies such as Indian Oil and Bharat Petroleum to fix fuel prices according to international crude oil rates. In reality, that freedom has several limitations.


So, months before Uttar Pradesh and four other states were to go for polls, oil companies stopped changing prices even as crude hit a 14-year high. After a 137-day halt, the fuel retailers raised prices 14 times from March 22 to April 6, for a total of about Rs 10 each on petrol and diesel. Prices of LPG cylinders and piped gas went up, too.


The price hike came at a time when inflation was already on an upward trajectory. Data showed this month that retail inflation hit an eight-year high and wholesale prices at a 31-year high in April. So, last weekend, the finance ministry lowered excise duty on diesel by Rs 6 and on petrol by Rs 8 a litre, and also announced a subsidy of Rs 200 per LPG cylinder to the poor.


The tax cut on fuels adds to similar measures for other commodities—from sugar and wheat to iron ore and plastics.



Sweet and sour


India restricts sugar exports _ Weekly Wrap Kuvera


The government this week restricted sugar exports to 10 million tonnes for the rest of the sugar season through September. The move aims to ensure enough domestic availability and keep prices stable until new supplies start reaching the market in November, although cane farmers and mills won’t be too happy about it.


The restriction may lead to an increase in international prices given that India is the second-largest exporter of sugar in the world this year. India’s sugar exports jumped from about 0.62 million tonnes in the 2017-18 sugar season to 5.96 million tonnes during the 2019-20 season. Shipments rose to about 7 million tonnes in 2020-21 season and 7.8 million tonnes so far this season, though contracts for export of about 9 million tonnes have been signed.


The export cap dragged shares of most sugar companies this week. Still, most sugar companies have outperformed the benchmark indices. EID Parry and Balrampur Chini Mills, two of India’s most valued sugar companies, are up 35-40% from their 52-week lows while Shree Renuka Sugars has almost tripled from its 52-week low. Many other companies such as Uttam Sugar Mills, Dwarikesh Sugar, and Mawana Sugars are up about 50%.


So, had you spent your money buying sugar stocks instead of eating chocolates and ice-cream, you would have been better off!


Apart from curbing sugar and wheat exports, the government changed duties on a wide range of commodities either to discourage outward shipments or to improve local supplies. Here’s a quick look:


  • It waived the 2.5% customs duty on the import of coking coal and ferronickel to help the steel industry.
  • It increased duty on iron ore exports to 50% from 30%.
  • It imposed 15% duty on exports of flat-rolled products of stainless steel and 45% on iron pellets.
  • It reduced the import duty on naptha and propylene oxide to help the plastics industry.
  • It allowed duty-free imports of 2 million tonnes each of crude soy oil and crude sunflower oil for this fiscal year and the next to meet the country’s edible oil needs.



New worries


The excise duty cuts have already brought down fuel prices, and will eventually help control inflation. Other changes in import duties and export curbs will further help control prices. But this has also raised another worry.


The duty cut on petrol and diesel will result in a revenue loss of almost Rs 1 trillion for the government. This means the government may find it difficult to meet the revenue targets it had set in the budget for 2022-23 on Feb. 1. This, in turn, means the fiscal deficit may be higher than the 6.4% targeted in the budget.


So, what options does the government have?


It can bridge the gap with additional market borrowings—but that will push bond yields and interest rates even higher. It can cut its expenditure—but that will affect economic growth. It can increase taxes on the rich, as some commentators have suggested, or sell more assets—but that won’t be easy either considering the result of the LIC IPO and the failed BPCL privatization.


Clearly, there are no easy choices here. And whatever choices the authorities might make and whatever planning they might do, let’s hope they don’t bring us further grief and pain.


Talking about pain, India’s much-celebrated startups—those “engines of growth” and the “backbone” of a new India, as Prime Minister Narendra Modi says—are in a world of pain.



‘Winter is coming’


Winter is coming _ Kuver Weekly Wrap


When Sequoia Capital and Y Combinator—among the world’s most prolific venture capital investors—warn about a winter in the middle of a scorching summer, you can be sure climate change is real!
Jokes aside, the first signs of pain in the Indian startup ecosystem are already visible. Startups such as Ola, Vedantu, Unacademy, Meesho and Furlenco have laid off 5,000-6,000 people so far this year, according to industry estimates. And the number could multiply by 10 times as a funding winter looms.


Another sign of the slowdown in the startup world is the drop in the number of new unicorns, or those valued above $1 billion. India created 42 unicorns last year, thanks to a funding euphoria. In the first three months of 2022, India added more than a dozen unicorns. That has now declined to just one in April and May combined.


While VC investors are turning cautious, public market investors are having a rethink, too. This is evident from the meltdown in stocks of tech companies, both in the US and at home.


Paytm and Zomato—two of the most well-known tech startups which went public last year—have plunged 65-70% from their all-time highs. Nykaa, PolicyBazaar and CarTrade are down 45-60%. FreshWorks, which listed on the Nasdaq, has slumped more than 70%.


Logistics company Delhivery, however, started on a strong note with its shares trading about 10% since their debut this month.


Part of the reason for the drubbing these companies have received is the lack of visibility on profits. This week, Paytm reported a wider loss of Rs 762.5 crore for the January-March quarter from Rs 444.4 crore a year earlier, though revenue surged 89% to Rs 1,541 crore. Similarly, Zomato’s net loss widened to Rs 360 crore for the fourth quarter from Rs 134 crore a year earlier, though revenue surged 75% to Rs 1,212 crore.


The weak performance of these stocks, as well as market volatility, is prompting many other tech startups, such as Oyo, to change their IPO plans. That’s prudent, no doubt. After all, we all know what happens to plans!



Other Headlines


  • Chipmaker Broadcom to acquire cloud services company VMware in $61-bn deal
  • SEBI allows mutual funds to offer passively managed equity-linked savings schemes (ELSS)
  • RBI to hike repo rate by 50 bps, lower FY23 growth to 7% in June, says Barclays
  • IndiGo, India’s biggest airline, posts wider Q4 net loss of Rs 1,682 crore versus Rs 1,147 crore a year earlier
  • Divi’s Labs reports 78% jump in Q4 profit, beats market estimates
  • Grasim Q4 profit increases 76% to Rs 813.6 crore due to write-back of tax provision
  • Coal India Q4 profit climbs 46% to Rs 6,693 crore on higher prices
  • Hindalco Q4 profit more than triples to Rs 1,601 crore but lags expectations
  • Page Industries, the licensee for Jockey innerwear, reports 65% rise in Q4 profit to Rs 190.5 crore



The Week Ahead


  • The RBI will auction government bonds of various maturities, giving an indication on the trajectory of bond yields.
  • The government will release GDP growth numbers for January-March and for the full fiscal year 2021-22.
  • The government will also disclose revenue, expenditure and fiscal deficit numbers for 2021-22.
  • Other key macroeconomic data to be watched is core sector output, GST collections and trade data, to be released by the government, and factory output data by S&P Global.


Until next week, happy investing!



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