Current Economic Statistics and Review For the Week 
Ended January 08, 2005 (2^nd Weekly Report of 2005)

  I

Highlights of  Current Economic Scene

Infrastructure

The Government of Maharashtra paid Maharashtra State Electricity Board (MSEB) Rs.407 crore as compensation towards subsidy for free power for the quarter ended December 2004 as directed by the Maharashtra Electricity Regulatory Commission (MERC) under Section 65 of the Electricity Act, 2003. MSEB was also provided with Rs.158 crore by the State to compensate its loss on account of subsidised power supply at Re 1 per unit to the powerloom producers in the State.

Neyveli Lignite Corporation Ltd, planned to set up a 125 MW power plant cum lignite mining project at Barsingsar. Similarly, National Thermal Power Corporation planning to commission in 36 months a 1000 MW power plant at Barh in Bihar.

Cement companies in Gujarat increased the price of cement by Rs.500 per tonne and Rs.25 per bag to Rs 135 per bag on January 4, 2005.

Major Asian oil consuming countries which account for 35 per cent of world’s oil consumption formed a unique regional oil bloc (forum) in cooperation with a few oil producers to determine a market to ensure the interests of both oil producers and consumers and to work towards oil price stability, long-term energy demand and supply security and sustainability of the oil market in Asia. India, China, Japan and Korea are members as oil consumers and Saudi Arabia, Oman, Iran, Qatar, U.A.E, Malaysia and Indonesia are there as producers.

Indian Oil Corporation will increase the capacity of its proposed oil refinery at Paradip in Orissa to 15 million tones and build it as a petro-chemical oil refinery by 2009-10 at an estimated cost of Rs 20,000 crore.

After a gap of six years, Rourkela Steel Plant (RSP) recorded net profit in the first quarter of 2003-04. On a turnover of Rs 1,880 crore in the first half, RSP reported a profit before tax of Rs 252 crore. With this the aggregate net profit of all four plants of Steel Authority of India Ltd (SAIL) was Rs 2,625 crore in the first half of 2004-05 against a net profit of Rs 2,512 crore for the full 2003-04.

The Pramod Mittal-controlled Ispat Industries is chalking out a plan to increase its steel production capacity from 2.4 million tonne per annum to around 5 million tonne per annum in three years.

India Cements is raising nearly Rs 250 crore through a mix of instruments to foreign investors Asia Debt Recovery Company Ltd, ADM Maculus Fund LP and Sheen Pearl Investments. The funds will be utilized to refinance the company’s existing debt and meeting its working capital needs.

Associated Cement Companies (ACC), the country’s second largest cement maker, has decided to sell off its Mancherial Cement Works in Andhra Pradesh. The decision will be placed before share-holders for their approval through postal ballot.

Corporate Sector
Government policies for the corporate sector

The government has revised the rates under the Duty Entitlement Passbook (DEPB) scheme, a popular duty neutralization scheme, for all 83 textiles products under it. The differential revised rates, effective from December 30, have been reduced by 60 per cent in case of cotton, 30 per cent for blended and woolen items and 22.5 per cent in case of man-made fibre and silk. 

The government is considering a proposal to reduce the customs duty on capital goods imported for setting up captive power plants. It has been proposed that the duty be slashed from the current 20 per cent to 5 per cent to bring it on a par with other power plants.

State-run National Thermal Power Corporation (NTPC) has envisaged an capital outlay of Rs 8,550 crore for 2005-06. The capital expenditure would be financed through a debt-equity ratio of 70:30. 

Neyveli Lignite Corporation Ltd (NTCL) will set up a Rs 1,368 crore power plant cum lignite mining project following a go ahead from the power ministry.
Reliance Industries has bagged a deep sea oil and gas block in the gulf of Oman and is looking for oil assets in Qatar, Iran and Saudi Arabia. The Gulf of Oman block is the company’s second overseas acquisition.

The National Thermal Power Corporation Ltd (NTPC), in an effort to transform itself into a global player, has bid for operation and maintenance of a plant and also a turnkey contract project in Libya.

Faced with the huge problem of over 300,000 defunct companies, the government said a new scheme would be announced this month to enable promoters to close such entities in a “hassle-free manner”.

Mergers & Acquisitions

Pantaloon Industries has acquired a majority stake in the Rs 85 crore Bangalore based Indus League Clothing. The company has bought out venture capital firm ICICI Ventures’ entire 68.29 per cent stake in the company for Rs 24.09 crore. 

Pantaloon Retail India has sold a 4.98 per cent stake preferentially to media giant Bennett, Coleman and Company (BCCL) for Rs 70 crore.

Chrys Capital III, LLC, Mauritius, will pick up 20.6 per cent stake each in truck financing firms Shriram Investments Ltd (SIL), Shriram Transport Finance Company Ltd (STFC) and Shriram Overseas Finance Ltd (SOFL) for about Rs 100 crore through a preferential issue.

ONGC Videsh has sought government permission to acquire a 15 per cent stake in Yuganskneftegas, the main production unit of Yukos, in Russia. The Indian company is willing to shell out up to $ 2 billion for the asset.

Disinvestment

The heavy industry ministry has consented to the finance ministry’s suggestion for part disinvestment of the government’s equity in bluechip PSU Bharat Heavy Electricals Ltd and automobile joint venture Maruti Udyog in the current financial year.

Company issues

Fresh allegations have surfaced of complicated financial transactions under which the shareholders of Reliance Industries Ltd (RIL) seem to lose out, while associate companies that are linked now to the Reliance promoters benefit by large sums. 

Reliance Industries Ltd (RIL) refuted allegations that four of its associate companies acquired its shares in a manner that the economic benefits of this holding accrued to the promoters, and not to its shareholders.

Seafood exporters have begun to feel the pressure of the tsunami. The Rs 7,000 crore industry that is already going through rough weather due to the anti-dumping duties imposed by the US on shrimp exports has been caught unawares by the gigantic catastrophe. Leading exporters like Hindustan Lever, Liberty Oil Mills and Alanasons among others have begun to experience an impact on their businesses. Though it is too early to quantify the effect, they anticipate a fall in marine exports.

Rejecting Reliance Infocomm’s plea that it be allowed to furnish a bank guarantee for Rs 84.7 crore, the Supreme Court has asked the company to pay the amount to Bharat Sanchar Nigam Ltd (BSNL) within a week. If the sum is not paid by that time, BSNL will be entitled to withdraw its services to Reliance Infocomm. 

Automobiles

Passenger car market leader Maruti Udyog Ltd (MUL), has reported 18.2 per cent growth in December 2004 sales. Though a new record was set in terms of total sales, sales of its entry-level car, M800, receded as the volumes declined by 42 per cent during December. Despite the loss of volume in A segment, the company managed to make impressive gains in the mini-B and B segments comprising Alto, Wagon-R and Zen, where volumes rose by 49 per cent in December 2004 compared with December 2003. Total volume in first three quarters of 2003-04 recorded an overall growth of 18.8 per cent. 

MUL raised prices by Rs 2,000-3,000 on all models except the entry-level Maruti 800.
MUL introduced Bharat stage III (BS-III) variants of the Zen, WagonR and Baleno with a price increase in the range of Rs 10,000 and Rs 15,000 per unit.

Czech car maker SkodaAuto has announced that its sales volume increased by 55 per cent in 2004 to 7,200 units from 4,656 units in the previous calendar year. 

Daihatsu Motor Co Ltd, a subsidiary of Toyota Motor Corporation, is examining its entry into the country’s compact car market.

Pharmaceutical

Though the country switched to a regime of product patents from January 1, the move has had no impact on the pharmaceutical market as no Indian company has withdrawn any product. According to India’s commitment to the World Trade Organisation (WTO), it will honour all product patents issued after 1995. But Indian companies argue that unless the government issues a patent on any drug, they are free to sell its clones in the country. 

Much of the world’s pharmaceutical companies are setting up research and development (R & D) centers in countries like India, where the cost of drug development is much lower than in the West. However, the Rs 381 crore Mumbai-based company, Glenmark Pharmaceuticals is planning to set up an R & D center in Switzerland, one of the most high-cost locations in the world. 

Dr Reddy’s Laboratories which has a drug manufacturing unit in china, plans to start drug development and research in that country in the next couple of years.
Airlines

Air-India and Indian Airlines, the two state-run airlines, are planning to set up their cargo operations in a big way. Indian Airlines is in the final stages of converting five Boeing 737 aircraft into freight aircraft. It is expected to use the Nagpur airport as a hub for its cargo operations and offer retail courier services. Similarly, Air India plans to significantly expand its cargo operations in phases over two years. 

Air-Sahara would begin flights to South-East Asia by March-April 2005 and long haul operations to London by September-October this year.
Textiles

The textile sector is free from export restraints after almost 40 years from January 1, 2005. With the lapse of multi-fibre agreement on January 1, the textile sector is open for competition.

New ventures

Ramesh Vangal, who played a key role in establishing Seagram in India, has announced the launch of his full fledged spirits company – Mason & Summer Alcobev. 

World Bank affiliate International Finance Corporation (IFC) and Netherlands Development Finance Company (FMO) are close to investing $ 7.5 million in Bangalore based emerging biotechnology firm, Avestha Gengraine Technologies (Avesthagen).

The Asset Reconstruction Company of (India) Ltd (Arcil) has taken over control of the management of a Mumbai-based packaging company Sharp Industries Ltd. This is the first instance of Arcil taking over the management of a company.

Bajaj Electricals has entered into a licensing agreement with a 30 million euro German luminaire company-Trilux Lenze-to introduce high-end luminaries in the Indian market.

Citigroup Venture Capital International (CVC International), a business unit of banking giant Citigroup, will invest in Caritor, a $ 55 million IT services company. Citigroup will play an instrumental role in helping Caritor expand its global operations, increase market share and strengthen capabilities across multiple industry sectors and for joint strategic initiatives.

The Rs 4,000 crore Godrej group has forayed into food retailing. Group company Godrej Agrovet has launched Nature’s Basket, which would sell fresh farm produce based on the concept of farm-to-plate. It has opened its first store in south Mumbai and plans to set up another 4-5 stores in the city.

Labour

The government has issued an ordinance to set up a full time statutory Pension Fund Regulatory and Development Authority (PFRDA), setting the stage for opening up the pension sector to private players. The role of PFRDA will be similar to IRDA and SEBI in insurance and capital market sector, respectively. A regulator will have a comprehensive authorization to undertake promotional and developmental functions for the pension sector in addition to the regulatory role. The government would also decide a permissible level of foreign direct investment in the pension sector as against the 100 per cent FDI indicated earlier. PFRDA will define the number of pension fund managers and regulate the proposed new pension system (NPS) to be effective from January 1, 2005 laying down the selection and eligibility criteria for pension fund managers. The NPS would mark a shift from a present system to a defined contribution system with three standard products broadly categorized as safe, balanced and growth. Under the new system, each employee would have to contribute 10 per cent of his salary to the Fund and a similar amount would be contributed by the government. A number of state governments are also showing their willingness to introduce the new system. All new recruits of the Central government from January 1, 2004 would come under the new system. The government also assigned a sum of about Rs. 60-70 crore as its own contribution towards the pension scheme in the first year; assuming that there would be about 50,000 new government new recruits with an average salary of Rs. 10,000 per month. 

Inflation

The annual WPI-based inflation fell to a six-month low of 6.39 per cent for the week ended December 25, from 6.5 per cent recorded during the previous week as against the rate of 5.9 per cent in the corresponding period last year. The fall in the year-on-year inflation rate was mainly due to drop in the prices of fuel, fruits and vegetables, edible oil and manufactured products. The WPI fell by 0.2 per cent to 188.2 points due to decline in fuel and manufactured items’ prices by 0.2 per cent each, although primary articles turned costlier by 0.2 per cent during the latest reported week. The index for primary articles’ group rose by 0.2 per cent to 186.1 points mainly due to hike in minerals and non-food items. The fuel, power, light and lubricants group index fell by 0.2 per cent to 288.1 due to lower prices of naphtha and furnace oil. The manufactured products’ group index dipped by 0.2 per cent to 166.6 points due to cheaper food products, textiles, chemicals and basic metals even as the prices of machinery, beverage and tobacco firmed up. 

Banking

Non-Food credit as on December 24, 2004 registered a growth of 22.2 per cent (exclusive of conversion, 18.1 per cent) as compared with an increase of 9.9 per cent during the same period the previous year. The annual growth rate was 31.6 per cent (exclusive of conversion, 27.2 per cent) as compared with 16.7 per cent on the corresponding date of last year.

As on December 24, 2004 food credit registered a growth of 21.7 per cent as compared to a decline of 26.5 per cent during the same period last year. The annual growth rate was 20.4 per cent as compared to a negative growth of 30.0 per cent for the corresponding date of last year. 

Loan disbursements by All India Development Banks (AIDBs) in the first 6 months of the current financial year was lower at Rs.5027.10 crore, as against Rs.5750.20 crore in the corresponding period last year. 

In sharp contrast, loan disbursements by investment institutions during this period were higher at Rs.5421.30 crore as against Rs.4615.60 crore in the previous year. 

Indian Overseas Bank (IOB) has raised Rs.150 crore through private placement of unsecured redeemable non-convertible subordinate bonds. The issue was fully subscribed much before the scheduled closing date. The coupon is 7.50 per cent and the maturity period is of 10 years and 3 months.

Cholamandallam Investment and Finance Company has completed the securitisation of Rs.85.4 crore of its auto-loan portfolio. Citibank NA had arranged the deal.

The Reserve Bank of India (RBI) has increased the risk weight on housing loans, fully secured by mortgage of residential properties, extended by primary urban co-operative banks to individuals, to 75 per cent from 50 per cent. In other cases, it will be 100 per cent. 

Telecom

As per the latest Telecom Regulatory Authority of India (TRAI) report, around 2.37 million telecom subscribers were added in December 2004 as compared to 1.79 million in November. Within the mobile segment, around 1.95 million subscribers were added during November as compared to 1.56 million in October. In the fixed line segment, a total of 0.42 million subscribers were added during November, which were predominantly WLL (fixed). With this the total subscriber base of fixed lines have reached 44.76 million. The year 2004 ended up with the tele-density improving by 30 per cent, achieving 8.62 as compared to 6.65 at the end of the previous year. 

 Telecom Regulatory Authority of India (TRAI) had slashed STD access deficit charges (ADC) in the range of 40 – 62.5 per cent. The ADC rate reduction in STD calls is in the range of 40 – 62.5 per cent and that on international long distance (ILD) calls is 41 per cent for outgoing calls and 23.5 per cent for incoming calls. The new rates will be effective from February 1, 2005. According to TRAI, the new ADC rate per minute on all inter-circle domestic calls will be uniform at 30 paise a minute. Major private cellular operators viz., Bharti Tele-Ventures, Hutch and BPL said that they would pass on the benefits of lower ADC rate to their subscribers. 

Public finance

The government has widened the net for levying excise duty on by-products of palm oils by including “inter-esterified fats” following a demand from the industry. The department of Revenue has issued a notification as per which Rs 1.25 per kg excise tariff will now be also levied on inter-esterified fats, re-esterified fats and elaidinised fats, same as the excise duty on hydrogenated vegetable oil and its by-products 

Tax collections in the third quarter of the current financial year have grown by 15 per cent. The tax department has managed around a 16 per cent growth in advance tax collections of around Rs 4,883 crore for the third quarter against Rs 4,203 crore in the corresponding period last year. Most oil companies and banks have ceased to be in the list of the highest corporate tax payers due to a hit in the performances of the oil companies following a rise in the oil prices and a fall in the treasury profits of banks.

The Planning Commission has said that it would require an additional Rs 39,500 crore to meet the additional demands under the Common Minimum Programme related programmes and those in the seven sectors identified by the Prime minister. The Prime Minister had identified agriculture, water, education, health care, employment, urban renewal and infrastructure as sectors, which needed greater attention. The total estimated requirement of Gross Budgetary Support for the current fiscal would be Rs 1,27,389 crore for the Central sectors. The required allocation for the state sector would be Rs 67,367 crore as against Rs 57,704 crore allocated in the current fiscal.

According to the draft white paper on VAT being finalised by the empowered committee, the Value Added Tax (VAT) regime will allow traders to make self assessment of their VAT liability, replacing the need for a compulsory assessment for a compulsory assessment at the end of each year. The paper has also proposed that the provisions for penalty in VAT Bills will not be more stringent than the existing Sales Tax Act. The empowered committee further added that imposition of VAT would not lead to a rise in prices of goods. The Empowered Committee of state finance ministers on VAT is considering a proposal to hike the upper limit of the annual gross turnover for filing returns from Rs 40 lakh to Rs 50 lakh.

The government is looking at the possibility of a hike in the 0.15 per cent Securities Transaction Tax (STT) on delivery-based equity trades in the coming budget. The hike is unlikely to be a hefty one. Revisions in the rates of non-delivery based trades is however not being considered.

The government is considering a proposal to reduce customs duty on capital goods, which are imported for setting up captive power plants. It has been proposed that the customs duty be reduced from the current 20 per cent to 5 per cent to bring it on par with other power plants.

The income tax department wants a bigger role in corporate mergers and acquisitions (M&A’s). All M&A propositions should be vetted and approved by the income tax authorities before they are put up for shareholder approval and subsequently for the approval of the high courts. The income-tax department has recommended that either the Companies Act should be amended or legal provisions should be clearly laid down making it mandatory for the companies and banks opting for mergers and amalgamations to get clearance from the income tax department.

The commerce ministry seeks for a substantial reduction in the direct and indirect taxes for exporters in its proposals to the finance ministry for Budget 2005-06. This move will help Indian exporters maintain global competitiveness and would also compensate for the disadvantages they suffer due to infrastructure bottlenecks and high input costs.

The Maharashtra government released Rs407 crore to the Maharashtra Sate Electricity Board (MSEB) compensating it for the free power offered to 23 lakh agriculturists in the third quarter of the current fiscal year, by using budgeted funds allocated to other development projects. Many experts have seen this move by the state government as unconstitutional.

Direct tax collections from Mumbai during April-December 2004, has registered an increase of almost 15 per cent over corresponding period last year. Mumbai accounts for almost 40 per cent of the all-India direct tax collection. The total direct tax collection during April-December 2004 was Rs 23,330 crore from the city against a collection of Rs 20,280 crore last year.

Capital Market
Primary Market

The board of Jindal Poly Films has approved placement of million equity shares with DEG of Germany for a total consideration of Rs. 47 crore at Rs. 360 per share.

Jet Airways Limited has filed its draft with Sebi to enter the capital market with its IPO aggregating to Rs. 17,266,801 equity shares (1.72 crore) of Rs. 10 each at a price decided through the book-building process.

Indoco Remedies is planning to raise Rs. 64 crore through an IPO for its expansion-cum-modernization projects. 

Secondary Market:

BSE has decided to shift 511 stocks from its B1 and B2 groups and 9 stocks from regional stock exchange (RSE) to the first phase of Indonext, to be launched by Union Finance Minister P. Chidambaram. The new platform will enable those companies with paid-up capital between Rs. 3 crore and Rs. 20 crore listed and traded on BSE and various participating RSEs to be traded in a national market, through a single order book on the BSE On-Line Trading (BOLT) system.

Sudden surge in the global crude oil prices at $45.43, a crash in London Metal Exchange and fears of US interest rate hike led to panic selling in the market. Though, the market recoup some of its losses, the BSE sensex ended the week with a loss of 182.23 points, or 2.76 per cent, at 6,420.46 and the broader 50-share S & P CNX Nifty lost 65 points, or 3.12 per cent during the week to close at 2,015.50. 

Derivatives:

The trading interest in the NSE F & O segment was at its record high in the week ended January 8. Nifty options witnessed open interest for Nifty calls at 2,050 and 2,100 while Nifty puts have more outstanding positions at 2,000 and 2,050 level. The option premium rose both for Nifty calls and puts, with the implied volatility increasing from 17 per cent to 23 per cent. 

Government securities market
Primary Market:

The RBI has fixed the rate of interest on the floating rate bonds, 2017 at 5.99 per cent per annum for six months up to July 2, 2005.

The RBI has set the cut-off rate for underwriting bids by primary dealers for auctions of the 9.39 per cent government stock, 2011 and 7.50 per cent government stock, 2034 to be held on January 4th at two paise and five paise per Rs 100, respectively.

The governments of 20 States have offered to sell 7.02 per cent state development loan, 2015 of 10 year maturity, aggregating about Rs. 6,000 crore on January 11.

RBI received good response for the 91-day and 364-day treasury bills auction, aggregating Rs. 4,000 crore, which included Rs. 2,500 crore under the MSS. For 91-day T-bill of Rs. 2,000 crore, RBI received 80 competitive bids aggregating Rs. 4,978 crore, of which it accepted 51 bids worth Rs. 2,000 crore. In case of 364-day T-bill, 56 bids of Rs. 4,364 crore were receives as against the notified amount of Rs. 2,000 crore. RBI accepted 35 bids of Rs. 2,000 crore.

Secondary Market:

The improved liquidity induced ease in the market saw the call rates settling in the band of 4.25-4.5 per cent after opening the week at around the reverse repo level of 4.75 per cent. Restoration of cash supplies saw an increase in the daily average subscription at LAF reverse repo auction to Rs. 34,181 crore from Rs. 709 crore in the previous week.

Decline in the inflation rate at 6.39 per cent caused the yield on the government securities to soften by 9 basis points. The yield on the popularly traded 7.38 per cent 2015 gilt, finished the week at 6.54 per cent as against the previous week’s close of 6.65 per cent, while the yield on the 9.39 per cent gilt closed at 6.50 per cent. SGL traded volumes remained in the range of Rs. 3,500-4,000 crore during the week.

Bond Market:

Andhra Bank has raised Tier-II bonds, amounting to Rs. 2,00,000 crore V-issue ‘E’ Series. The subscription to the subordinate debt programme of the bank opened on January 3.

The AAA 5-year yield slipped to 6.95 per cent before ending at 6.98 per cent during the week. Traded volume was above Rs. 175 on a daily average, higher from less than Rs. 100 crore in the preceding week.

Foreign Exchange Market:

In a volatile forex market, the rupee plummeted by 37 paise against dollar, on back of a resurgent dollar and FIIs liquidating their investments in the equity market. However, the rupee recouped its loss to end the week at 43.82/83 per dollar, while touching intra-week low of 43.96/98 per dollar. 

The foreign exchange reserve rose to $131.178 billion for the week ended December 31, from $131.015 billion a week earlier.

Commodity Market:

The Multi-Commodity Exchange (MCX) is witnessing a rise in the trading and deliveries in rubber and pepper futures. The total volume for the pepper December 2004 contract period was 917 mt valued at Rs. 6.6 crore, of which 10 mt resulted in a physical delivery. Rubber December 2004 contract accounted for the total volume of 2614 mt valued at Rs. 14.6 crore in the contract period. Both the commodities have one tonne contracts with price quotations per quintal.
The The National Commodity and Derivative Exchange (NCDEX) has amended its norm for levy of charges and penalties relating to futures contracts. In case of failure in delivery obligation, the defaulting seller has to pay a penalty, which is a close out rate along with 3 per cent mark-up, to the exchange. Additionally, a penalty of 5 per cent of close out rate, which previously was7 per cent, would be levied on the seller. Further, following non-fulfillment of either of whole or part of the settlement obligation for funds pay-in, penalty at the rate of 0.09 per cent per day would be computed on outstanding amount.
The NCDEX launched futures trading in two more agriculture commodities- maize and gur taking the total to 23 agriculture commodities available for trading.

Credit Rating:

Crisil has assigned an AAA (so) rating to the Rs. 2 billion Series A pass through certificates backed by a pool of residential housing loan mortgages of ICICI Bank, the rating is based on the strength of the credit quality of the pool cash flows, its origination and servicing capabilities, the credit enhancement mechanism, and the unique structural features of the transaction.

Icra has assigned a conditional rating of LAA (so) to the Rs. 81.58 crore NCD programme of Taj Lands End (TLEL-earlier known as The Lokhandwala Hotels Private Limited), the rating is based on the strength of the structured payment mechanism, the financial strength of India Hotels as the licensee of TLEL as well as India Hotel’s commitment to TLEL as reflected through the terms of the structure.

In an another exercise, Icra has reaffirmed the LAAA and A1+ rating assigned to Rs. 600 crore long-term debt and Rs. 300 crore short-term debt programme of Hindustan Aeronautics Ltd. It has also reaffirmed the LAAA rating assigned to Rs. 200 crore subordinate programme of Standard Chartered Bank as well as the A1+ rating assigned to Rs. 60 crore CP of Samsung India Electronics.

Care has assigned a PR1 rating to the proposed CP programme of REI Agro (RAL) for an amount of Rs. 100 crore (enhanced from Rs. 50 crore) for a maturity upto one year. The rating draws strength from the established track record of RAL. The rating is however, constrained by the working capital intensive nature of RAL’s business and vulnerability of the basmati rice industry to vagaries of nature.

Fitch has assigned an F1 (ind) rating for an enhanced amount of Rs. 17 crore to short-term debt programme of Television Eighteen India (TV18). The rating is, however, constrained by debt funded capex incurred for the new studio facility at Mumbai, TV18’s current scale of operations and the uncertainty associated with the launch of the Hindi business news channel.

Theme of the week:

A Review of Economic Performance in 2004

1. As the year 2004 has come to an end, Indian economy presents a mixed picture.While the performance of agriculture has not come upto the expectation, industry is recovering and exports are on the rise, promising to achieve higher growth. Inflation has been brought under control, after it rose sharply under the impact of soaring global oil prices. However, a disappointing feature has been the government’s failure to raise resources to meet its proposed expenditure in the budget.

2. After an impressive GDP growth of 8.2 per cent during 2003-04, there would be slowdown in 2004-05 largely due to poor agricultural performance. There was an initial expectation that the country would achieve a GDP growth of about 7-7.5 per cent. However, the Central Statistical Organisation’s (CSO) GDP estimate at 1993-94 prices for the second quarter of the current fiscal year reveals a growth rate of 6.6 per cent over the corresponding period of the previous year. The preceding quarter experienced a growth rate of 7.4 per cent, thus leaving a gap in performance which could be compensated for by improved rates of growth in industry and services sectors. In fact, the contribution of manufacturing sector in the overall growth is on the rise and this sector is expected to grow by about 8 per cent in 2004-05. The services sector is also reported to be growing more or less at the same pace as manufacturing. Domestic investment continues to rise, business confidence is high, FII inflows are strong and the Sensex had touched an all time high. All things considered, the GDP growth is likely to hover around 6-6.5 per cent in 2004-05. This is also the expectation of a majority of corporate heads in the country.

3. Agricultural production, particularly kharif production has suffered a setback largely due to indifferent weather and deficient monsoon. At the beginning of the season, a target of 225 million tonnes of foodgrains was set on the assumption of normal monsoon. Contrary to expectation, though the south-west monsoon arrived on time, it turned deficient as the season progressed. As a result, kharif output would be lower than projected earlier. Though efforts are on to recover the loss in kharif season by stepping up production in rabi season, it is too early to predict the size of rabi crop. Meanwhile, the agriculture ministry has announced a hike in current rabi foodgrain target to 135 million tonnes from 125 million tonnes set earlier. Luckily, as per the latest report, the country is set to achieve a record production of wheat in 2004-05. On the whole, it appears that agricultural production in the current season would be higher by one or two per cent compared to about nine per cent growth achieved in 2003-04. In other words, the subdued agricultural performance would drag down the overall growth in GDP in 2004-05.

4. Despite the shortfall in anticipated production, there is enough stocks of foodgrains to take care of consumer needs. At the last count, there was a stock of 23.63 million tonnnes, comprising 11 million tonnes of rice and 12.63 million tonnes of wheat compared to 22 million tonnes comprising 5.6 million tonnes of rice and 16.4 million tonnes of wheat a year earlier. What is more, procurement of rice is in full swing with 11.8 million tonnes having been procured so far as against 10.8 million tonnes a year earlier. Total procurement has posted a 7 per cent increase to 28.4 million tonnes in the same period of 2003. At the same time, offtake of foodgrains has declined by 26 per cent to 22.8 million tonnes during April-October 2004 from 30.7 million tonnes during the same period in the preceding year. It appears that FCI’s decision to restrict the allocation of foodgrains for open market operations as well as for exports purposes in the context of fall in stocks in the early part of 2004-05 could have been the reason for this decline in offtake.

5. On the other hand, the scenario on the industrial front continues to be bright. The cumulative growth of industrial output during April-October 2004 was 8.4 per cent with manufacturing sector witnessing a highest growth of 8.8 per cent. During the same period a year earlier, industrial output and manufacturing output stood at 6.2 per cent and 6.8 per cent, respectively. Electricity generation has doubled to 7.1 per cent compared to 2.9 per cent in the earlier period, while mining output rose to 5.0 per cent as against 3.9 per cent in the corresponding period a year ago. Basic goods posted a growth of 5.4 per cent, while capital goods recorded a growth of 15.1 per cent against 4.3 per cent and 9.2 per cent during the same period a year earlier. Intermediate and consumer goods reported a growth of 7.6 per cent and 10.0 per cent during April-October 2004. The current industrial buoyancy is expected to continue in the remaining months of 2004-05, as machinery and equipment, the indicator of investment activity in the economy is still growing strong. In a related development, non-food credit has shown a phenomenal rise between April and December, where it amounted to Rs. 1,45,723 crore ( net of conversion )compared to Rs. 67,269 crore a year ago. The rising demand for industrial credit signifies buoyancy in demand for industrial goods.

6. If there is a sector which has performed exceedingly well during the first three quarter of the financial year it is exports, which touched $ 53 billion recording a growth of 23 per cent between April-December 2004. This is on the top of 24 per cent rise recorded in the first eight months of the financial year. The recovery of global economy and the resurgence of world trade have been the main reasons for the surge in exports. The commerce minister is optimistic that if this tempo is maintained, the country’s exports would touch $ 75 billion by the end of the current financial year. Encouraged by the impressive performance, the commerce ministry reset the export target for 2005-06 at $ 88 billion. Similarly, export targets have been revised for the subsequent years, 2006-07, 2007-08 and 2008-09 at $ 104 billion, $125 billion and $ 150 billion, respectively,. The commerce ministry is also planning to fix sectoral export targets by consulting industry representatives. At the same time, import bill has soared by 34 per cent to $ 73.6 billion during the same period. Imports during the corresponding period of the fiscal year stood at $ 55.1 billion. High cost of imported oil amounting to $ 21.5 billion represented a rise of 46 per cent as compared to $ 14.7 billion for April-December 2003. In view of the strong increase in imports, the trade gap for the period widened by $ 8 billion to $ 20.1 billion. The trade deficit for the corresponding period of the previous year stood lower at $ 11.8 billion.

7. The country’s stock market continues to be in the grip of bullish sentiments, particularly in the later half of the year. Both the primary and secondary markets experienced a boom period. Dispelling all myths about the shallowness of the market, the year 2004 ended with an impressive upsurge in public offerings with a total mobilization of Rs. 30,511 crore as against Rs.2,194 crore raised in 2003. In fact, the year’s equity mobilization of Rs. 30,511 crore is the highest ever in the history of Indian capital market, more than twice the previous best of Rs. 13,887 crore raised in 1995 by a record 1444 companies. The huge increase came primarily from offer for sale which went up to Rs. 19,808 crore in 2004 compared to Rs. 1,282 crore in the previous year. A total of 13 companies, compared to five in the preceding year made offers for sale. Significantly, a 85 per cent of Rs. 16,819 crore of this amount was accounted for by seven government disinvestments. On the other hand, six offers were made by the private sector aggregating Rs. 2,989 crore, with the TCS leading the pack with disinvestments of Rs. 2,778 crore. In terms of raising fresh capital too, the amount increased to an impressive Rs. 10,703 crore as against Rs. 911 crore in 2003.

8. In the secondary market, the BSE Sensex has been gradually climbing in the past three-months, reaching the peak of 6609 on the last day of 2004. The NSE Nifty also closed at its all time high of 2088.45. The rally was triggered by the outcome of the US elections where Bush administration was voted back to power. Technical stocks gained the most as Bush’s return dispelled fears about a possible backlash on outsourcing had democratic candidate John Kerry won the polls. The market also received support from falling inflation. Also the global crude prices have dropped to $ 40 a barrel. Lastly, there was a sudden surge in FII inflows, reflecting growing confidence in Indian stock markets. FIIs’ had pumped in $ 8.51 billion in 2004 and continued to do so in the future. The abrupt infusion of funds has given a big push to the market sentiment. The year also saw Sensex witnessing its highest ever single fall at 564.81 points or 11.14 per cent on May 17 and its highest ever single day rise at 371.86 points or 8.26 per cent recorded on May 18. Brokerage houses believe that the Sensex would hover around 5800 to 7200 in 2005.

9. The sharp rise in prices caused mainly by soaring global oil prices became a source of concern for the government. Global crude oil prices soared from $ 30 a barrel to almost $ 60 a barrel in the wake of political unrest in Iraq, fall in fuel inventories in the US and absence of spare capacity with major oil producing countries. These developments combined to exert pressure on oil prices which have a high weightage in wholesale prices index . The impact of such high oil prices on countries which import a substantial volume of oil could be disastrous. In the country the index of wholesale prices touched its four-year high of 8.33 per cent on August 21, as against 3.88 per cent in the corresponding week a year earlier. Suddenly realizing that stronger measures are needed to soften the blow, the government initiated steps to bring down the prices of oil by cutting duties on imported oil. Thereafter, wholesale prices remained under control and declined gradually to 5.78 per cent in the week ended January 01, 2005 mainly due to a fall in prices of fuels, vegetables and fruits, edible oils and other food items. The Reserve Bank of India’s report on Currency and Finance 2003-04 has envisaged softening of wholesale prices with the easing of oil prices, improved rabi crop prospects and reduction in money supply. It may be recalled that in a mid-term review of its annual policy statement, the Reserve Bank has revised its inflation projection to around 6.5 per cent assuming no major supply shocks and manageable liquidity conditions.

10. A distinguishing feature of 2004 has been the strong growth in bank credit. Non-food credit expanded by 18.1 per cent in the current financial year upto December 24, 2004. The growth in credit for housing and consumer durables continues to be a matter of some concern to the extent it reflects on credit quality but a source of comfort is that the overall credit growth is reasonably well dispersed across sectors. Though credit growth has shown an uptrend, money supply (M3) growth has remained subdued. Despite the surge in trade deficit, a strong case for further liberalization of trade and rationalization of tariffs exists. Overall, however, the current trends do point to continued surpluses in balance of payments, with possible marginal deficit in the current account being more than compensated by continued strong inflows particularly on account of inflows on Foreign Direct Investment (FDI) and FII flows. 

11. On balance of payment front, the country is in a comfortable position, having added $ 27.5 billion reserves in 2004, taking the aggregate foreign exchange reserves to a record level of $ 131 billion. Though the country has to suffer trade deficit of $ 17.4 billion between April-September 2004, largely due to soaring prices of crude oil in the international markets. This was nearly offset by large earnings on capital account which rose to $ 10 billion during these six months compared to $ 11.5 billion during the same period a year earlier. What is significant to note is that the rupee continues to appreciate against the dollar, the exchange rate having come down to 43.30 towards the end of 2004 from 45.42 at the beginning of 2004.

12. However, a major source of worry is the profile of the central government finances. At the end of November for which the data are available, the center has mobilized Rs. 1,93,686 crore which represented an increase of about 4 per cent over the collection in the comparable period of the previous year. Income tax collection till the month of November 2004 stood at Rs. 23,390 crore which though higher than the amount collected during the same period by 13 per cent, constituted only 46 per cent of the budget estimate. Similarly, though the corporate tax collection was higher by 53 per cent over the same period last year, represented only 38 per cent of the budget estimate. The lower collection was due to the decline in profitability of some of the major oil companies and banking sector. The indirect tax collection also fell short of its target. Customs and excise duty collections amounted to Rs. 89,758 crore as against Rs.1,63,449 crore for the full year, accounting for 54.9 per cent. Similarly, non-tax revenue collections also declined to Rs.42,392 crore to constitute 56.2 per cent of the budget estimate. However, total expenditure of the government during April-November 2004, showing Rs. 2,64,403 crore has seen a decline of 5.6 per cent compared to an increase of 25 per cent during April-November 2003. Plan and non-plan expenditure stood at Rs. 68,692 crore and Rs. 1,95,511 crore, respectively. Though fiscal deficit has been controlled, bringing down to 51.5 per cent of the budget estimate, the performance of the revenue deficit has been a cause for concern. At the end of November, the revenue deficit reached 97.1 per cent of the budget estimate.

*These statistics and the accompanying review are a product arising from the work undertaken under the joint ICICI research centre.org-EPWRF Data Base Project.

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