In this edition, we talk about India’s manufacturing sector, Vedanta’s planned chip factory and the shelving of BPCL’s privatisation. We also talk about inflation in India and the US, and Fitch’s decision to slash growth forecasts.
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A long, long, really long time ago, the bear-king Jambavan exhorted Hanuman to believe in himself when the monkey-god was in doubt over his ability to cross the vast ocean to reach Lanka in search of Sita.
“O leader of the monkeys!… You are superior in strength, wisdom, brilliance and valour to all beings. Why do you not realise your own strength?” said Jambavan, as per a translation of the Valmiki Ramayana maintained by IIT Kanpur.
Why are we talking about two characters from the epic Ramayana? Well, people in India rely on Ramayana and Mahabharata from time to time to make a point. This week, Nirmala Sitharaman did just that.
Addressing a business summit, the finance minister asked the industry to step up investments in the manufacturing sector and grab the opportunities arising out of a shift away from China.
“Is it like Hanuman? You don’t believe in your own capacity, in your own strength and there got to be someone standing next to you and say you are Hanuman, do it? Who is that person going to tell Hanuman? It can’t certainly be the government,” she said. “I want to hear from India Inc. what’s stopping you?”
We don’t know whether any industrialist actually spoke up, but we do know why Sitharaman wanted them to invest in manufacturing.
In September 2014, the government launched the Make in India programme with an aim to boost the share of the manufacturing sector in India’s economy to 25%. What was manufacturing’s share then? About 16-17% of GDP. What was its share a decade before? About 16-17%. What’s the share now? About 16-17%.
No, there is no typing error in the paragraph above. Manufacturing’s contribution to the economy has remained stagnant for at least two decades. The reasons range from policy hurdles to low productivity and high cost of doing business, and successive governments have failed to solve the problems. Clearly, the manufacturers remain in doubt.
When chips fall into place…
Talking about manufacturing, the sector was in the news this week also because of billionaire Anil Agarwal’s Vedanta announcement of a semiconductor facility.
Vedanta, which seems to be on a PR overdrive for the past few months as it told and retold the story of Agarwal’s humble origins, will build the chip factory in a tie-up with Taiwanese electronics giant Foxconn. The $19.5-billion factory in Gujarat is expected to create 100,000 jobs.
Interestingly, Vedanta’s announcement comes barely months before Gujarat heads for assembly polls in December, where the BJP is seeking re-election.
Gujarat’s gain was Maharashtra’s loss. Maharashtra, India’s most industrialized state, lost the project reportedly because it didn’t promise Vedanta the incentives it wanted.
By when will Vedanta invest the promised sum? Details are sketchy but Vedanta has clarified it won’t be making the investment itself but its holding company will. This came after Vedanta’s shares fell sharply on Friday.
Can the mining and energy conglomerate help Gujarat leap ahead of technology hubs like Karnataka? It’s too soon to say.
…and when they don’t
Oil minister Hardeep Singh Puri said this week that the government has put the plan to sell Bharat Petroleum Corp Ltd (BPCL) on hold. The decision, after searching for a buyer for months, could affect India’s disinvestment target.
The government has budgeted Rs 65,000 crore from disinvestment in the current fiscal year. It has so far raised Rs 24,543 crore, including Rs 20,516 crore from the initial public offering of Life Insurance Corp.
Why has the government shelved BPCL’s divestment? The Covid-19 pandemic, volatile energy prices, and geopolitical conditions apparently made prospective buyers uncertain. A lack of clarity on fuel pricing autonomy also deterred the suitors, which included Vedanta and US-based buyout funds.
Meanwhile, the government will soon invite bids for selling its stake in IDBI Bank, which is controlled by LIC.
Byju’s report card
Byju’s, India’s biggest ed-tech company, this week reported a loss of Rs 4,564 crore for 2020-21 after a delay of 17 months. The company also said its revenue fell 3.3% to Rs 2,428 crore as it adopted a new revenue recognition model and deferred about 40% of its revenue to subsequent years.
The ed-tech startup, which commands a valuation of more than $20 billion, has also deferred its plan to go public citing uncertain global conditions.
Byju Raveendran, co-founder, told Reuters that the company was looking for a listing this year but has now pushed the timeline to the end of next year, assuming the macroeconomic conditions will improve.
Core problem
Last week, Sitharaman had said inflation wasn’t a “red-letter” priority for the government. Latest government data this week showed why it should be.
India’s consumer price index-based inflation accelerated to 7.0% in August from 6.71% in July and exceeding analysts’ estimate. Separately, wholesale inflation dropped to an 11-month low of 12.41% in August.
Retail inflation has remained well above the Reserve Bank of India’s comfort zone of 2-6% for many months and wholesale inflation has stayed in double digits for almost one and a half years.
To make matters worse, the finance ministry apparently sought to obfuscate the numbers. The ministry said in a tweet that core inflation, calculated by excluding the transient component of CPI such as food, beverages, fuel and power, was 5.9% in August, “remaining below the tolerance limit of 6% for the fourth consecutive month”.
Many Twitter users pointed out—rightly so—that the 6% tolerance limit is for CPI, not core inflation, and that the ministry was misleading the public.
Could it be that some ministry official made an honest mistake? Well, it could be but we have our doubts.
Monetary tightening
The August inflation print makes it more likely that the Reserve Bank of India will increase interest rates further at its next monetary policy meeting later this month.
Many analysts feel the RBI could raise its repo rate by another 50 basis points, after lifting the benchmark lending rate by 140 points since May, as it will remain focused on managing inflation.
Another factor that may influence the RBI’s decision is the outcome of the US Federal Reserve’s policy meeting next week. The US Fed is likely to increase interest rates by 75 basis points after inflation in the US came in above forecasts at 8.3% for August. In fact, even a 100-bps hike is not being ruled out.
Analysts and economists say central banks have few options but to focus firmly on controlling inflation even if it means an economic slowdown. Ratings firm Fitch, for instance, this week slashed India’s economic growth forecast for the current fiscal year to 7% from 7.8% estimated in June. Fitch also cut next year’s forecast to 6.7% from 7.4%.
Fitch has also cut global growth forecast, to 2.4% in 2022 from 2.9%. It forecasts the US will suffer a mild recession in mid-2023 and the euro zone as well as the United Kingdom will enter recession later this year.
Market wrap
The markets traded mostly sideways this week before ending the five-day period about 1% lower amid weak global cues and after US stocks fell as inflation in the world’s biggest economy surprised on the upside. The BSE Sensex topped 60,000 this week while the NSE Nifty 50 crossed 18,000, but both indices ended below the levels.
The Nifty 50 stocks that gained the most this week were IndusInd Bank, Adani Ports, and state-run companies Power Grid and NTPC. The Bajaj twins—Bajaj Finance and Bajaj Finserv—and Royal Enfield maker Eicher were among the other gainers.
Tech companies were among the top Nifty 50 losers during the week. Infosys, Tech Mahindra and TCS fell 6-8% each while HCL Tech lost around 5%. BPCL, two-wheeler makers Hero MotoCorp, Bajaj Auto and automaker Mahindra & Mahindra were among the other losers.
Other headlines:
- Gautam Adani overtakes Jeff Bezos to become world’s second-richest man
- Tamilnad Mercantile Bank debuts with 3% discount at Rs 495
- Adobe agrees to acquire online design firm Figma for $20 billion
- Adani Wilmar eyes acquisitions to push food business
- Axis MF study shows SIP route earns higher returns than lumpsum
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ED lifts freeze on WazirX’s bank accounts after investigation
- SEBI seeks details on startup valuation from PE, VC funds
- Tata Group plans to buy stake in Bisleri International
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India IIP growth falls to four-month low of 2.4% in July
- In setback for NDTV, tax department says no bar on warrant conversion
- Goldman Sachs plans to cut several hundred jobs
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HCL Tech lays off 350 working on Microsoft project
The week ahead
- The DGCA will release India’s domestic air passenger traffic data for August.
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The US Fed’s next Federal Open Market Committee meeting is scheduled for September 20-21.
Until next week, happy investing!
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