Current Economic Statistics and Review For the Week 
Ended February 12, 2005 (7^th Weekly Report of 2005)

  I

Highlights of  Current Economic Scene

Industry

The general Index of Industrial Production (IIP) with base 1993-94 for the month of December has registered a growth rate of 7.9 per cent as against 7.4 per cent in December 2003. The cumulative growth rate (April-December 2004) was 8.4 per cent. This has been a marked improvement over the growth rate achieved in the corresponding period of the previous year, which was 6.6 per cent. Manufacturing sector achieved a commendable growth rate at 9.0 per cent during the first three quarters of the current fiscal year on top of a growth rate of 7.2 per cent in the same period last year. Electricity, too has posted an impressive growth rate at 6.4 per cent against a much lower 3.5 per cent in the first nine months of the previous year. Mining has posted a growth rate at 4.8 per cent in the concerned period. 

Under the use-based category, capital goods sector has been the driving force registering a double-digit growth rate at 13.3 per cent. This was over an impressive growth rate of 10.1 per cent during the first nine months of the previous year. Both basic goods and intermediate goods sector have also maintained robust growth rates at 5.9 per cent and 6.7 per cent, respectively. The consumer durable sector has maintained its upward trend to register a growth rate of 15.3 per cent, while consumer non-durables sector recorded a growth rate at 9.8 per cent.

In the two-digit classification, six sectors have posted growth rates above 8 per cent during April-December 2004. Of these six sectors, four have posted double-digit growth rates, namely textile products, basic chemicals and chemical products, machinery and equipment other than transport equipment and other manufacturing industries. On the other hand, three sectors have shown negative growth rates namely food products, jute and other vegetable fibre and wood & wood products: furniture and fixture. The remaining eight sectors have recorded growth rates between one per cent to seven per cent. 

Infrastructure

Growth in power generation during April-December 2004 was 6.6 per cent over that of the corresponding previous period. The plant load factor also increased from 70.8 per cent to 73.4 per cent during the same period. 

Growth in cement output during the ten –month period of the current fiscal was 8.5 per cent – an increase from 94.96 million metric tonnes in the previous fiscal to 103.03 million metric tonnes. Cement despatches during the same period in 2004-05 also registered a growth of 8.4 per cent from 94.67 million metric tonnes to 102.62 million metric tonnes.

Yukos claimed $ 28.3 billion as compensation from the Russian Government for alleged expropriation of its investment in Russia. It also filed a reorganisation plan, with the U.S. bankruptcy court, while disputing the $ 27.5 billion Russian tax bill with a plea to refer it to an international arbitrator. 

Corporate Sector
Policy issues

The government is rethinking on altering the corporation tax rate during 2004-05. It is unlikely to reduce the rate because of concerns over possible loss of revenue. 

The draft rules of the new Companies Act specified that a public company with a paid up capital of Rs 5 crore or a turnover of Rs 20 crore shall have a minimum of seven directors. The existing Companies Act says a public company has to have at least three directors. Public companies will have six months of time till their next annual general meeting to comply with the new law regarding the number of directors and independent directors once it becomes effective. 

The government is considering enhancing the investment limit for the small scale sector from Rs 1 crore to Rs 5 crore, besides raising the foreign direct investment cap from 24 per cent to 49 per cent. 

The government is expected to allow private Indian carriers Jet Airways and Air Sahara to start daily services to Singapore and Kuala Lumpur as a part of its plans to allow domestic private carriers to start international operations. 

The five judge constitution bench decided in the drawn out case that states did not have the right to impose luxury tax on tobacco products. This is a good news for cigarette companies. 

The government is proposing 74 per cent foreign direct investment (FDI) in asset reconstruction companies (ARCs). The FDI limit will include investments by a single or group entity, foreign institutional investors (FIIs) and non-resident Indians.

The government moved the Company Law Board (CLB) to appoint six directors as its nominees on the board of Morepen Laboratories. In its petition under section 408 (1) the government has alleged mismanagement on the basis of scrutiny of the company’s accounts till September 2003.

Disinvestment

India Inc asked the centre to raise the disinvestment target to at least Rs 25,000 crore in 2005-06 budget. Corporates and certain economists are of the view that disinvestment proceeds should be used to restructure public sector units and not just to raise revenue. 

Mergers & acquisitions

The Chatterjee group (TCG), the promoter of Haldia Petrochemicals Ltd (HPL), is looking to become a global supplier of petrochemicals technology through the acquisition of the knowledge and research and development assets of Basell, a global major in petrochemical technology and products. 

Reliance Industries will commission the newly acquired mono-ethylene glycol division of SM Dyechem Ltd by March 2005, just within three months of taking over the plant. The plant at Kurkumbh near Pune, with a capacity of 80,000 tonne per annum, was shut since 1996 following the company’s inability to pay its dues to secured creditors. 

Mumbai-based biotech company Gufic Biosciences started discussions with potential investors, offering them close to 10 per cent equity in the company. 

Ion Exchange (India), a pioneer in water and waste water treatment, is merging its four companies under the aegis of Ion Exchange Services. 

The state owned Power Grid Corporation Ltd is close to accepting an offer by Reliance Energy Ltd. to acquire 74 per cent stake in a joint venture power transmission project in Himachal Pradesh. 

The Vijay Mallya owned United Breweries (UB) is buying two south-based breweries in a bid to expand its capacity. The company is set to take over the D K Adileshavulu owned Karnataka Breweries & Distilleries for about Rs 180 crore. Further, the company is also in talks with Balaji Distilleries to acquire its half a million hectoliter brewery in Chennai. There was an open offer by British brewer Scottish & Newcastle (S&N) to acquire an additional 20 per cent equity stake in United Breweries at Rs 575 crore. 

Strides Arcolab announced the acquisition of an additional 12.5 per cent stake in Strides Latima, its subsidiary in Latin America, from Elcemar Almeida & Associates for a consideration of around Rs 27 crore ( $ 6 million). 

Unitech Ltd, the Delhi based real estate development and construction company, is planning to buy out Hyundai Corporation of Korea in their 50:50 joint venture called Hyundai Unitech Electrical Transmission. The company makes transmission towers for the power sector. 

New ventures

Tata Tea decided to sell off 17 of its tea estates in southern India to a new company being formed by a group of employees of the company. 

Vedanta Resources, the mining and metals Indian company listed in London, will invest Rs 7,000 crore to set up a 5 lakh tonne per annum aluminium smelter at Jharsuguda in Orissa. 

Coromondel Fertilisers announced that its governing board approved of an investment in a South African company, Foskor, to the tune of 2.5 per cent of its equity. 

India’s first budget airline Air Deccan signed a $ 600 million deal to buy engines from British Rolls Royce-led consortium to power the 32 A320 passenger jets it acquired from Airbus Industries. 

Siemens India plans to invest $ 500 million i.e., approximately Rs 2,200 crore in the country over the next 3-4 years for expanding its production capacities, as well as augmenting its R&D capabilities and hiring more software professionals. This move is expected to help Siemens leverage the upturn in the domestic capex cycle, as well as expand the role of Siemens India in the global operations of its parent company. 

Reliance Industries is looking afresh at the six product pipelines for which it received approval from the government in the last week of January 2005 even as it initiated informal talks with Indian Oil Corporation (IOC) to join hands for the project. 

Suven Life Sciences embarked on drug discovery and development support services in the post IPR regime in 2005. In clinical development, the company entered into a strategic alliance with US-based United Therapaeutics Corp Inc for conducting phase four clinical trials on their product in India. The initial contract is valued at $ 2,449 million for the 15-months study to be conducted in over 30 institutions in India. 

Hyundai Motor India signed a deal with telecom service provider Tata Indicom to facilitate the implementation of its global dealer management system, a software that would help its dealers stay connected with the company in real time. 

The Ontario-based Thomson Corporation through its group company, Thomson holding BV, proposed to engage in wholesale trading of its products such as books and online resources in India, by setting up a wholly owned subsidiary for this purpose. The group planned to invest $ 3 million over the next five years to expand its operations in India. 

GAIL India and SAIL entered into an agreement for supply of 3.56 million metric standard cubic metre per day natural gas/R-LNG to various plants of SAIL in 2006-07. 

Chevron Phillips Chemical Company LP, a joint venture of Chevron Texaco Corporation and Conoco Phillips, is in talks to licence ‘lube slurry polyethylene technology’ to local oil companies, which are foraying into petrochemicals. 

Ranbaxy Laboratories is setting up a manufacturing facility in Brazil to cater to the Latin American market. It has also established a regional office in Rio De Janerio. Ranbaxy is the fifth largest generic company in Brazil with sales of $ 32 million. The plant is coming up on the outskirts of Rio and is expected to be complete in 2006. 

Bharti Televentures, the largest GSM service provider in the country, announced a new business structure with the inclusion of four regional hub chiefs in the northern, southern, eastern and western parts of the country. 

Tata Steel is expected to recommence the feasibility study for its steel plant and a fertilizer unit in Bangladesh. The company had earlier called off the study following a political turmoil in the country. 

Indian drugs maker Wockhardt would set up majority-owned joint ventures in Mexico and South Africa, to tap into growing demand for generic drugs. The company also expected to file 15-18 abbreviated new drug applications in the US in 2005. 

Kajaria Ceramics is expanding capacity at its Sikandrabad plant by 4.2 million square metres to 9.70 million. The spread is funded through internal accruals and loans. 

Hindustan Motors is planning to roll out a car in the luxury ‘D’ segment from the Mitsubishi stable in 2005. This model will be in the price range of Rs 10-12 lakh and is likely to compete with Honda Accord, Toyota Camri, Skoda Octavia and Opel Vectra. The company has sought permission to develop its surplus property at an ailing plant in the eastern state of West Bengal. It could possibly build residential apartments on its sprawling 743-acre Uttarpara plant on the outskirts of Kolkata. 

China’s largest appliance maker Haier launched its mobile phones in India on Tuesday and hopes to sell 500,000 units in the first year of operations. 

The storage terminal for liquefied natural gas (LNG) being set up in Ennore near Chennai is likely to be completed in 2009. The project is jointly promoted by the Indian Oil Corporation (IOC) and Chennai Petroleum. 

Indian Oil Corporation’s $ 1.2 billion petrochemical plant at Panipat will be operational by December 2005. 

Anyway India, a direct selling company, stepped into the premium skin care segment with the launch of five products under the ‘Attitude’ brand in Kolkata. 

Gears, shafts and timing gears manufacturer Hi-Tech Gears signed a deal with its foreign collaborator Getrag Corporation for sourcing automobile components from India. 

Mangalam Cement, a B K Birla group firm received sanction from the Board for Industrial and Financial Reconstruction (BIFR) for its revival scheme. With this approval, the company has become debt free and will be able to exercise its revival plan. 

Metso Minerals, the euro 4,000 million Finnish mineral mining and construction equipment company, is looking at options to expand its Indian operations. 

Tata Power is planning to set up a 1,000 mega watt power plant in Rajasthan. The investment will be around Rs 4,000 crore. 

Ricoh Company Ltd, the $ 17 billion Japanese office automation company could make Kolkata its assembling hub in south-Asia. Ricoh India, the subsidiary, may locate the production and assembling facility of Gestetner India at Salt Lake in Kolkata following the merger of Gestetner with Ricoh. 

Airlines

Jet Airways placed orders to acquire 10 Boeing 737-800 aircraft that will join its fleet in 2006-07. In 2004-05, the aircraft is taking on lease seven Boeing 737-800 aircraft of which three would be used to kick-start its operations on the India-London sector. 

The European aircraft maker, Airbus, started talks with Hindustan Aeronautics Limited (HAL) to develop components for its latest offering, the A380, in India. Boeing awarded a new deal to the Shiv Nadar-promoted HCL Technologies to develop software for its latest aircraft, the 787 Dreamliner. Boeing is also working with the Indian Institute of Science (IISc), Bangalore, in a strategic alliance to conduct research in aerospace materials, structures and manufacturing technologies. India seems to be emerging not just as a market for global aircraft manufacturers but also as a destination to outsource manufacturing and software development. 

Air Sahara, which launched its first aviation hub in the country in Hyderabad, now intends to connect hub Hyderabad to Singapore, Kuala Lumpur, Bangkok and Hong Kong. 

Company issues

Bajaj Auto filed a suit against UTI Mutual Fund in the Bombay High court for prematurely winding up the bonus plan of its Growth & Value Fund on December 31, 2004. 

Subex Systems offloaded 14 per cent stake in the company for Rs 55 crore. 

The Asset Reconstruction Company of India (Arcil) after taking over the Karnataka based Bellary Steel and Alloys’ unfinished steel plant decided to conduct an auction for the steel plant. Arcil took over the company’s bad debts from various lenders. 

Punj Lloyd, an engineering construction firm, raised $ 50 million through a private consortium.

NIIT Technologies tied up with SAP, the US based collaborative business solutions provider, to focus on implementing projects in the government and public sector. 

Consumer durables major Mirc Electronics claimed that it had become the second largest CTV maker in the country after LG since October 2004. 

Union minister for communication and information technology stated that the government will present its recommendations to the Telecom Dispute Settlement Appellate Tribunal on the Reliance Infocomm dispute on February 10. Reliance faces a penalty of Rs 150 crore and stands to lose its licence. 

Holcim, the $ 9.4 billion Swiss cement maker, is setting up to become the world’s largest cement company if it manages to wrest control of the Associated Cement Companies (ACC), overtaking the current leader, French cement major, Lafarge. Holcim’s annual production capacity will go up to 166.2 million tonne if its proposed offer to take control of ACC succeeds. Lafarge’s cement capacity stands at 150 million tonne. 

Company results

Hindustan Lever Ltd reported a 32.55 per cent decline in net profit, after accounting for exceptional items, to Rs 333.67 crore for the quarter ended December 2004. It is the sixth consecutive quarter in which HLL reported a decline in net profits. 

Cognizant Technology Solutions’ net income for the fourth quarter ended December 2004 increased by 72.88 per cent to $ 30.6 million as compared to $ 17.7 million registered in the fourth quarter of 2003. 

Tata Motors reported a 22.5 per cent growth in its January 2005 sales at 39,000 units against 31,840 vehicles in January 2004. 

Reliance Infocomm recorded a 12.71 per cent jump in its average revenue per user at Rs 320.39 for the quarter ended December 2004 against Rs 284.25 registered for the previous quarter ended September 2004, according to the data published by the Cellular Operators Association of India. 

Henkel Spic India (HSIL) suffered a net loss of Rs 6.10 crore for the year ended December 2004 as against a net profit of Rs 6.24 crore posted in the same period in 2003. However, its net sales, including excise rose by 8.94 per cent to Rs 400.68 crore from Rs 367.78 crore.

Inflation

Continuing the slide since November, the annual rate of inflation on point-to-point basis dipped to 5.25 per cent for the week ended January 29 from 5.37 per cent a week ago. The annual rate of inflation was 5.91 per cent during the corresponding week a year ago. The WPI went up by 0.1 per cent to 188.5 points due to an increase in the price of mass consumption primary items like vegetables and fruits and manufactured items including sugar and salt. The WPI inflation fell mainly on account of fall in prices of edible oils. The fuel prices remained firm, notwithstanding the dip in global markets ahead of the OPEC (Organisation of Petroleum Exporting Countries) meeting. The index of primary articles group was up by 0.2 per cent to 185 points due to rise in the prices of some food and non-food items. Fuel, power, light and lubricants group index remained unchanged at the previous week’s level of 287.9 points, despite fall in global crude futures on speculation that OPEC which pumps more than one third of the world’s oil, will not cut production. The manufactured products group index rose marginally by 01 per cent to 167.5 points due to higher prices of tobacco, wood, paper, chemicals, non-metallic minerals, basic metal alloys and transport equipment. Government revised inflation upwards to 7.07 per cent for the week ended December 4, 2004 instead of the provisional level of 7.02 per cent. 

Labour

Number of private sector trade unions have called for the extension of training and skill upgradation facilities to the scheduled class and scheduled tribes, but have vetoed the government proposal to extend job reservations to the private sector. The government had written to about 122 trade unions in mid-November 2004 requesting them to put forward their views for further industry consultations. The government official sources have declared that only about 30 trade unions have responded and every one has shown red flag to the proposal of reservation. 

According to Hewitt Associates’ 9th annual salary increase survey, India demonstrated the highest average salary increase in the Asia-Pacific region, which accounted to 13.7 per cent hike in 2004. It is also expected that it will continue in 2005 with a hike of 14.2 per cent. Salary increments in India are much higher than it’s counterparts such as Philippines with 8.1 per cent, China with 7.6 per cent, and Thailand with 7.5 per cent. However, this rise in salaries is mainly attributed to the higher inflation and attrition rates, resulting in corporate sector’s positive outlook in salary increases across industries in 2004. This hike is additionally due to robust performance of companies in the last year. 

Banking

In the first ever case of an Indian public sector bank acquiring an overseas bank, the State Bank of India (SBI) has acquired 51 per cent stake in the Mauritius-based Indian Ocean International Bank (IOIB). IOIB is a retail bank based at Port Louis, which has 7 per cent market share in Mauritius.

Bank of Baroda’s board has declared an interim dividend of 18 per cent i.e. Rs.1.80 per share.

HDFC Bank has obtained the approval of the Reserve Bank of India (RBI) to raise its exposure to the stock market from 5 per cent to 10 per cent of the outstanding advances at the end of the previous financial year.

Reserve Bank of India (RBI) has cancelled the certificate of registration issued to MG Kalyan Leafin and Investments of Hyderabad for carrying on the business of non-banking financial institution.

YES Bank has licensed an integrated cross platform treasury solution ‘MXG2000’ from French company Murex for trading and risk management. The state-of-the-art solution will enable straight through processing of all treasury transactions with rapid turnaround timing. The treasury solution will be implemented for YES Banks treasury products, including fixed income, money market, foreign exchange and interest derivatives. 

The Reserve Bank of India (RBI) has cancelled the certificate of registration of Al-Ameen Islamic Financial and Investment Corporation Ltd. for carrying on the business of a non-banking financial institution. 

Manipal-headquarted Syndicate Bank has deferred its plans of the second public offering in the second quarter of the next financial year, as the bank wants to raise Rs.100-200 crore instead of Rs.50 crore for which the government has already given sanction. 

Housing Development Finance Corporation Ltd (HDFC) has allotted 2,38,139 equity shares of Rs.10 each, under its employee stock option scheme. 

Indian Bank has entered into agreement with three overseas exchange companies for inter-country money transfers. 

The Reserve Bank of India (RBI) has directed non-banking financial companies to create a floating charge on their statutory liquid assets in favour of their depositors. RBI has also asked NBFCs to ensure full cover at all times for public deposits to protect depositor’s interest. 

Housing 

The country’s largest housing finance company HDFC, has lowered lending rates by a quarter percentage point on two of its loan schemes. After the reduction, loans above Rs.10 lakh will be available at 7.25 per cent on variable rate loan. 

Insurance 

Max New York Life has reported Rs.21 crore profit in US GAAP terms for the calendar year 2004, as the company’s total premium income has doubled to Rs.348 crore. 

Tata AIG General Insurance Company has announced the launch of ‘Business Travel Guard’ a first of its kind group insurance cover that gives comprehensive overseas travel coverage for the business traveller. 

Information Technology

Tata Consultancy Services (TCS) has won an Rs.341 crore ($78 million) order from the Ministry of Company Affairs to improve registration services. This is one of the largest e-governance initiatives based on public-private partnership named DCA21. The genesis behind conceptualism of DCA21 has to be traced in the tremendous growth of corporate sector. Beginning with 29874 companies at work in the country on April 1, 1956, the number of companies has grown to about 6.5 lakh at present. The ministry seeks to improve its machinery to keep pace with this phenomenal growth.

Citigroup Global Markets has chosen i-flex’s flagship product suite – Flexcube for loan origination, loan syndication and secondary loan trading business for its US and UK operations. 

Red Hat has opened its global engineering and support centre in Pune, for strategic engineering work. The centre will be increasing its headcount from 30 to 150.

Global IT solutions provider NIIT Technologies Ltd had signed a strategic alliance with SAP to jointly tap the $33.5 billion Indian enterprise resource planning sector and plans to add 200-250 personnel in the country. 

Public Finance

The finance ministry has instructed all the ministries not to spend more than 33 per cent of the total allocation of the year in the fourth quarter of the year. According to available sources, nearly Rs 30,000 crore remained unspent at the end of December 2004. The finance ministry has also asked ministries and profit making banks to give interim dividends. Until December end, there was a shortfall of Rs 5,000 crore in normal dividends with Public Sector Undertakings (PSUs) in sectors such as power yet to declare their interim dividends.

The finance ministry is planning to bring down majority of the items to the median rate of 16 per cent as part of excise reforms. It is also planning to increase the service tax from 10 per cent to 12 per cent. It is believed that though the cut in the peak rate could increase the pressure on revenue, lower tax slabs are likely to improve compliance.

The budget is likely to correct the inverted duty structures that hinder new investments in many sectors of the economy. Duties on IT hardware, consumer durables, including electronic items is likely to be corrected. Customs duties on gold and glass products too would be recast.

The budget is likely to increase the defence outlay only by 18-20 per cent instead of the suggested 40 per cent as put forth by the Defence ministry. Consequently, the forces may not be left with too much funds to invest in new equipments as most of the increase will go to for financing the salary increase of armed forces officers and jawans after the implementation of the Ajai Vikram Singh committee report.

The auto industry is likely to get major tax sops in the coming budget. The government is considering halving of the additional excise duties on cars to 4 per cent and lowering of the customs duty on plastics and metals, which are key raw material for auto components. This move could be beneficial to the consumers in terms of cheaper cars and two wheelers if the benefits of lower duties are passed on.

The government is considering a proposal to halve excise duty levied on drugs and other pharma products to 8 per cent from 16 per cent. The government is also planning a marginal hike in abatement allowed to pharma companies under the new MRP-based excise assessment system. Abatement is likely to be raised from 35 per cent to 40 per cent. The Finance ministry is considering the chemicals and petrochemicals department’s proposal to slash the customs duty on fuel oil used for power generation from 20 per cent to 8 per cent in the Budget. A major proposal that is being considered is to halve the Customs duty on naphtha to five per cent. The reduction in the Customs duty on naphtha will help reduce the cost of producing fertilisers and electricity.

Brokers engaged in commodity futures trading have sought tax breaks to boost trading. According to brokers, since futures trading in commodities is similar to equities trading, brokers getting commission from their clients on commodity future trading should also be granted a tax exemption.

The textile sector has listed out its demands from the forthcoming budget. This includes: 

* A reduction in the mandatory excise duty on man-made staple fibre from 16 per cent to 8 per cent. 
* A reduction in the mandatory excise duty on polyester filament from 24 per cent to 16 per cent. 
* Dereservation of 26 items under the small-scale industries sector, including knitwear segment. 
* Creation of a special fund, clubbing the apparel park scheme and textile centre infrastructure development scheme to provide assistance upto Rs 50 crore. 
* Enhancement of the up-front subsidy for SSI sector under TUF Schemes from 12 per cent to 15 per cent.

The Finance ministry has to spend another Rs 4,000 crore as subsidy for fertilizers. The sum, which is over and above the Rs 12,662 crore already budgeted for 2004-05, will be provided in the second supplementary budget for the current fiscal year.

A National Irrigation mission with a corpus of Rs 5,000 crore is likely to be announced in the forthcoming budget. The fund will be used to meet the aim set by the UPA government in its National Common Minimum Programme (NCMP). Irrigation was given the highest priority in NCPM and the programme also aimed at completing all the ongoing irrigation projects.

The government may not alter the corporation tax rate this year due to a concern over lack of revenue. The government is not too sure about the impact of the value added tax on states and was also expecting some revenue loss owing to a reduction in import duties.

The government plans to slap a 40 per cent flat tax on black money disclosed. According to the scheme that may be announced in the Budget, the balance 60 per cent will have to be parked in a special government security floated for this purpose. The dedicated security may not carry a coupon rate. At best, it can offer a nominal return.

The union cabinet has approved setting up of phase –II of tax information network (TIN) at an estimated cost of Rs 101.25 crore over three years. Out of the total amount, Rs 68.75 crore would be payable by the government and Rs 32.3 crore would be raised form tax deductors. The year wise outgo would be Rs 33.75 crore per year during 2005-06, 2006-07 and 2007-08.

The cumulative staff cost of states has gone up by 25 per cent since 1999-2000 to reach Rs 94, 632 crore in 2003-04, according to the 12th Finance Commission. As per cent of states total income (or gross state domestic product), it works out to 5.43 per cent. The share of staff cost in the sates’ total revenue expenditure translates into 31.5 per cent.

According to Annual Fiscal Framework (AFF) 2005-06, Andhra Pradesh has seen a considerable decline in its fiscal and revenue deficit for the year 2004-05. The fiscal deficit is likely to fall to 3.4 per cent of the gross state domestic product (GSDP) in the current year against 4.2 per cent for 2003-04. The revenue deficit is likely to be recorded at 0.93 per cent by the end of this fiscal year against 1.66 per cent in 2003-04.

The annual Plan outlay for Punjab for 2005-06 has been fixed at Rs 3,550 crore. According to the chief minister of the sate, the government’s focus would be on the energy sector, which had 31 per cent share of the total outlay. The social services sector would receive 24.7 per cent of the total allocation. The state government has also decided to set up a Social Security Fund of Rs 450 crore for payment of pension to the aged, widows, disabled etc.

The Planning Commission has also approved a Plan outlay of Rs 11,000 crore for Gujarat for the year 2005-06, which is a 29 per cent increase over last year’s figures.

Maharashtra’s debt has shot up to Rs 1,10,000 crore. However, the government has refused to consider this as a matter of concern. The government’s assets and its debt/equity ratio was more than that of any other state.

The Union finance commission was considering a proposal to provide a special package to Maharashtra to enable the state to take care of its Rs 1 lakh crore loan. The special package would contain reduced interest rates and certain waiver schemes. The chief minister said that the sate would strive to find out ways to increase the revenue and obtain fresh loans at cheaper rates to pay back sums obtained on higher interest rates.

The Maharashtra government would soon make a formal plea to the Centre for raising Rs 1000 crore through open market borrowings (OMB) to make payments to the cotton growers under the loss making cotton monopoly procurement scheme.

Capital Markets
Primary Market

A slew of corporates are expected to raise Rs 5,000 crore in the second half of February from the primary market through the book building process. 
Jet Airways has set a share price band of Rs. 950-1125 for IPO, which opens on February 18 and close on February 24. The company plans to sell 1727 million shares to raise funds to pay debt and buy more aircraft for its domestic and international operations.
Allsec Technologies Ltd., a call center services provider plans to raise Rs. 60 crore through an IPO for its expansion and acquisition plans and the IPO is expected to hit the market in April 2005.

Secondary Market

The BSE sensex continued its bullish sentiments for the third consecutive week on the back of sustained FII inflow by gaining 98.95 points or 1.49 per cent to close at 6,633.76 and over the last three weeks, it gained 8.6 per cent. Despite the sensex gaining ground, it ruled volatile following alternate bouts of buying and selling due to profit booking at higher levels. The S&P CNX nifty ended at 2082.05 after rising 4.1 points over the previous weeks close.

Net FII investment till February 11 has been Rs 4,459 crore with purchases at Rs 10317 crore and sales at Rs 5858.20 crore. Mutual funds were net buyers on almost all of the trading sessions fuelling bullish sentiments. 

BSE market capitalisation touched a new high at Rs. 17,18,817 crore on February 11 as the sensex gained 55.93 points to close at 6633.76. 

The BSE CG on February 9, hit its all time high of 3162 points before closing at 3152.8, a gain of 81.32 points over its previous session. The rally was on expectation of higher demand as the Union cabinet cleared a favourable National Electricity policy. Similarly, reflecting the significant gains in consumer durables, the BSE CD index rose by 7.12 per cent to 1661.02. 

Derivatives 

The trading activity in F&O segment remained lacklustre and volumes surged only during the last hours of trading session,indicating that investors are wary of volatility ahead of the announcement of the budget.

Government Securities Market
Primary Market

On February 7, the RBI re-issued 8.35 per cent 2022 for the notified amount of Rs 5,000 crore at a cut-off yield of 7.34 per cent (at a price of Rs 109.75).

 
Secondary Market

With the fall in the inflation rate, the yields of medium and long-term securities have eased thereby pushing the yield curve downwards. The yield on the 10-year benchmark security, 7.38 per cent 2015, eased from 6.72 per cent on February 4 to 6.46 per cent on February 11. Also, there was buoyancy in the market due to the higher than expected cutoff was set at the auctions. 

Bond Market

Power Grid Corporation launched its Rs. 500 crore, with a greenshoe option to retain another Rs. 500 crore, privately placed bond issue with coupon rate ranging between 7.10 per cent and 7.50 per cent 

Union Bank has raised Rs 450 crore by issuing tier-II capital bonds thereby raising its capital adequacy ratio to about 13 per cent. These bonds carry a coupon rate of 7.15 per cent for a tenor of 10.3 years. 

Foreign Exchange Market

The rupee depreciated by 32 paise against the dollar from Rs 43.47 on February 4 to Rs 43.79 on February 11 as the RBI intervened in the market to arrest a sharp appreciation of the rupee. Despite depreciation of the rupee, the six-month forward premia closed lower at 1.55 per cent on February 11 as compared with 2.13 per cent on February 4.

Commodities Market

The first day of trading in crude oil in MCX saw impressive trading volume of Rs 63 crore that equalled one per cent at New York Mercantile Exchange (NYMEX) recording a turnover. 

The MCX in partnership with Financial Technologies and National Agricultural Co-operative Marketing Federation will set up India’s first electronic exchange for spot trading in commodities called the National Spot Exchange For Agricultural Produce. NSEAP will be a national level electronic exchange linked to agriculture produce marketing co-operatives (APMC) and other physical market players through a electronic platform. NSEAP will facilitate a consumer-producer linkage across the country to disseminate critical information, on commodities to enable farmers sell their produce at the higher prices. Food processing units and corporate houses will be able to buy goods directly from the market through this exchange. 

The chairman of Forward Markets Commission said that the total trade in commodity futures during the current financial year 2004-05 is projected at Rs 5 trillion.

External Sectors

The India-China bilateral trade has reached $13.6 billion in 2004. India has managed to earn a surplus of $ 1.75 billion.

Imports of 300 sensitive items have come down by 0.5 per cent during April-November 2004 in the current fiscal year. Exports of rubber, automobiles, fruits and vegetables, and tea and coffee have recorded significant increases. Imports of edible oil, cotton and silk, spices and milk and milk products have posted a decline during this period. 

India’s IT and ITES exports are expected to touch $ 50 billion by 2008. India’s exports in electronics and computer software in 2003-04 were worth $14.28 billion, out of which software and services account for $12.60 billion.

Minister of state for external affairs, is visiting Honduras, Suriname and Mexico, as part of policy to focus on Latin America. India’s exports to the eight Central American countries in 2004 were around $ 150 million and there is scope to increase them to $ 500 million in the next four years. An announcement for aid of $ 2million would also be made for setting up a regional IT training centre in Central America.

A comprehensive economic partnership agreement (CEPA) between India and Sri Lanka, which would be covering goods, services and investment, is soon to become a reality. The agreement would have four main components. It will seek to widen the FTA to include more goods and facilitate trade by removing non-tariff barriers. An agreement on trade in services is another important part of the CEPA. Measures for promotion on investment and cooperation in infrastructure and transportation will also be included in the agreement.

Vegetable oil prices are likely to go down in the domestic retail market as import norms for crude palm oil have been relaxed by the government. The centre has also relaxed quality norms for CPO import by reducing the minimum carotenoid value. Though the total imports of edible oils may not be affected by this, CPO is likely to replace refined palm oils.

The Foreign Trade Policy to be announced next month is likely to set up monitoring committee for promoting exports of automobile components and pharmaceuticals. These two sectors have been identified as having huge export potential. Besides focusing on ways to boost exports the committees will also look at ways to improve Research & Development (R&D) in these sectors. These committees will review existing policies, identify bottlenecks and suggest ways to eliminate them.

The Export Promotion Council of India for EOUs and SEZs has sought income tax exemption to EOUs for 10 years as it is given to SEZs to attract investments in the export oriented units.

The replacement for exporters Duty Entitlement Pass Book (DEPB) scheme would, for the first time refund all duties, taxes and levies incurred by exporters in addition to reimbursements of excise duties. As per a plan being set up by the commerce department and the Director General of Foreign Trade (DGFT) in consultation with the revenue department and the state governments, the new scheme would neutralise the incidence of excise duties as well as a host of other duties and levies such as electricity duty, fuel tax on petrol, oil and lubricants, entry tax etc.

Traders and importers dealing in cloves want the existing import duty of 70 per cent to be brought down by 55 per cent to bring it at par with other spices like black pepper and cardamom. 

Domestic production of cloves is insignificant. Price in India shot up from Rs 150 per kg to Rs 250 per kg when import duty was raised from 35 per cent to 70 per cent.

The International Trade Commission (ITC) of the US has initiated steps to seek public opinion on whether there was a need to review the anti-dumping duty imposed on shrimp imported from India and Thailand in the wake of the tsunami disaster. The Seafood Exporters Association of India (Seai) has initiated efforts to move jointly with Thailand in the matter as the disaster has adversely affected the fishing industries of both the nations.

The International Monetary Fund is considering using its huge gold reserves to help finance debt relief for the world’s poorest countries. Overall sub-Saharan Africa owes some $70 billion to multilateral lenders. The fund holds 103.4 million ounces of gold.

Credit Ratings

Icra has upgraded the Rs. 1.59 billion bond programme of HMT Ltd. to LBB(so), following the settlement of the overdue in the bonds. 

In an another exercise, Icra has assigned A2+ rating to the short-term debt programme of Chattisgarh Electricity Company, the rating takes into account its established position in the domestic manganese ferroalloys market. It has also assigned an A1+ rating to National Housing Bank’s Rs, 10 billion commercial paper programme/short-term debt programme, the rating takes into account the banks important role in the housing finance industry and comfortable liquidity position and profitable operation.

Crisil has assigned an AAA/stable rating to Canara Bank’s Rs. 9.5 billion bond issue, the rating reflects the bank’s strong market position, comfortable resource profile and good earning level vis-a-vis peers as well as the strong support available from the government of India to public sector in general.

Theme of the week:

Uncertainty Still Lingers

1. Textiles is one of the leading sectors of the Indian economy in terms of value of production, exports, employment and contribution to exchequer. According to one source, next to agriculture, textile sector is one of the major sectors in terms of providing employment. The sector has a high potential for growth, taking into consideration the availability of raw materials, low labour cost and growing market. A fiber neutral tax regime for domestic textile sector could become a realistic in the forthcoming budget as the government may slash customs duty on man-made fiber and intermediaries by 5 per cent. Customs duty on synthetic textiles across the value chain is the same. While there is 20 per cent customs duty on raw materials of staple fiber, such as PTA and MEG, the import duty is applicable to end products – synthetic fiber. Interestingly, paraxylene ( raw material for intermediaries such as PTA and MEG) attract only 5 per cent import duty. On the excise duty, a reduction by 8 per cent on the MMFs is expected to encourage use of synthetic fibers and help industry take the Cenvat credit. Those who wished to take the Cenvat credit are unable to do in the synthetic textile sector due to anomalies. Currently, mandatory duty on MMFs is 16 per cent, whereas duty applicable to textile products manufactured from such fiber is 8 per cent.

2. However, to make use of this opportunity, India has to deal with the dominance of the small scale industries in the sector, low productivity levels and labour laws. There are over 10,000 small scale units which do not have any scope to invest in technology. India has barely 4 per cent of the global textiles markets and less than 3 per cent of the share of apparel. The report prepared by Assocham suggests that a lack of any serious trade pact and preferential access to major markets is a major drawbacks. As per the report, both China and Pakistan can pose a major threat to Indian exports. China is the biggest producer of cotton and man-made fibers which accounts for 25 per cent of global share. It is also the largest exporter of textiles (16 per cent) and apparel (23 per cent) with the largest spinning and weaving capacity. Pakistan’s strength lie in low labour cost and raw material base in cotton and man-made fibers. Thailand, though lacking in raw materials such as cotton/cotton yarn, has modern weaving machines superior to India and enjoys better logistic infrastructure. In order to face competition, Assocham suggests that India must promote FDI in textiles and all indirect taxes on manufactured goods such as excise and value added tax should replace Central sales tax.

3. Texprocil, a cotton textile export promotion body, has expressed deep concern over the reduction in Duty Entitlement Pass Book Scheme (DEPB) rates for cotton textile products yarn, fabrics and made-ups by further 15 per cent announced last week on the eve of removal of quotas after four decades of protectionism. The body has called for restoration of earlier rates and termed the rates as unfair and unjustified. With the issues likes quality, contamination and now availability of extra long cotton remaining unresolved, exporters of cotton textiles , cotton yarn, fabrics and made-ups were relaying on imports of cotton in a large measure and as such a reduction in the rate of almost 60 per cent from the erstwhile three months ago was inexplicable and unjustified . Moreover, with exporters having entered into contract which are currently under production and shipments a reduction in DEPB rates for cotton textile products at this stage will adversely affect the costing and prices negotiated by them with importers. With the prices, expected to fall on account of removal of quotas, reduction in DEPB rates at this juncture will further aggravate the situation.

4. Mr. Kamal Nath, the Commerce minister, expects a 50 per cent growth in export to the freed US and European union markets in the very first year. Textile minister, projects that India’s apparel exports will double in the next two years. His assessment is that India would benefit from lifting of the quota immediately, while China, the country projected to be the biggest beneficiaries will be able to enjoy that opportunity only two years from now. A study carried out by PHDCCI revealed that India has an edge over China and South-East Asia in labour cost in both textiles and clothing. As proportion of total cost, the labour cost in India is only 6 per cent compared to 10 per cent in China, 19 per cent in Mexico, 22 per cent in Thailand, 29 per cent in Turkey, 51 per cent in South Korea and 69 per cent in Germany. Only Indonesia has a lower labour cost of 5 per cent. Besides, India has the capital cost advantage, too. The proportion of capital cost to gross output is 6.7 per cent in India in the textile industry and 7.8 per cent in garment making, while those at China are 12.2 per cent and 12 per cent, respectively.

5. It is here, that training received from well known companies comes to an aid. Realising the employment potential of the post-MFA boom in textile industry, State governments are rushing to house institutions that can provide skilled human resources to textile units. The Uttar Pradesh and Gujarat governments have tie-up with the Apparel and Leather Technic to launch training colleges that would churnout trained workers for textile factories. West Bengal, Tamil Nadu, Andhra Pradesh, Maharashtra and Himachal Pradesh are also in touch with the Bangalore firm which offers a variety of training programmes to impact production related skills for textile industry. The growing demand for comprehensive training in textile production, skills, especially fabrication of garments, follows expectation that the country’s textile exports would double in a couple of years even as domestic industry also continue to expand. Till now, most textile units were going in for in house training or use of unskilled labourers. The impending emergence of India as a major production center for the global textile market has changed the methodology of the textile industry. If India has to increase its share in global textiles market to 4 per cent as compared to current 2 per cent, there is a strong need for investment in capacity, technology and training.

6. With a number of big textile players winding up manufacturing operations in the US and Europe, Indian figures among a handful of countries vying for the resorting of investments and the idle capacities from these companies. Major US textile players, including the likes of Burlington Industries, West Point Stevens, Pillowtex, Fruits-of-the-Loom and Malden Mills have already wound-up operations during the last couple of years, while others such as Tommy Hilfiger Corporation has streamlined its operations base in the US and has closed its ‘Young Men’s’ jeans division earlier this month. A number of big processing units in European countries have also shut shop during the last year. While the US and European retailers are already sourcing from India in a big way, western textile manufactures have stopped short of actually investing in manufacturing units in the country so far largely due to stringent labour laws, high exist barriers and bureaucratic hurdles. According to a Crisil estimate, the Indian textile sector needs Rs. 1,40,000 crore investment across the value-chain in the next five years to exploit the post-quota opportunities.

7. The Federation of All India Textile Manufactures Association (FATIMA) has submitted a pre-budget memorandum to Sankarsingh Vaghela, Union textile minister, seeking to ensure a level-playing field for cotton and man-made textiles, by lowering excise duty on blended and polyester fabrics. Addressing a press conference, Mr. Arvind Poddar, president of Fatima said that disparity in excise duties should be done away with. When cotton enjoys exemption from excise duties, blended yarn and polyester attract duties of 12 per cent and 24 per cent, respectively. On value added tax (VAT), Mr.Poddar said while textile sector did not attract (VAT), garments did not come under VAT umbrella which led to confusion. Textile sector needs encouragement and implementing VAT on garments and made-up will hamper the growth prospects. The trade body has also pleaded for lowering the services tax rate to 5 per cent on textile industry. 

8. While international retail chains such as Wal-Mart, JC Penny and Target are in the midst of big expansion plans in India to take advantage of the scrapping of textile export quota, several others have made their debut in the country to source their prospects. Some of the big names that have set up their Indian offices in the pace of few months are Tesco, Sara Lee, Bombay Company, Sears, Zegna and Li and Fung. As per the latest information available with the department of Industrial policies and promotion, as many as 16 foreign direct investments proposals pertaining to textiles were approved during January-September 2004. Textile ministry officials said a number of players that were earlier sourcing through third parties, were now setting up their own offices in India. This will allow them to interact with the sellers directly and reduce cost by eliminating middlemen.

9. Italian menswear specialists Ermenegildo Zegna is planning tie-up with Indian players to sell their finished products and also source inputs from India. Zegna, which already has a franchise showroom in Mumbai is likely to open another one in Delhi. Marks and Spenser whose products are being retailed through Diwan Sahib is also understood to be expanding its presence in the country. Most of these deals are for ready made business. Similarly, a consortium of 12 non-resident Indian and four foreign companies are investing Rs.75 crore in a Bangalore based Royal Embroiders. In addition, companies like Indian rayon has entered into technical tie up with Glaunzstoff of Austria for improving its production process of viscose filament yarn. Similarly, the Faridabad based SPL Industries has tie-up with Nano Tex of the US for wrinkle resistant and water and oil repellent technology for cotton garments.

10. India’s current share in the world textile trade is only 4 per cent, according to a study by the World Trade Organisation (WTO). But the Indian government says it can be doubled to 8 per cent by 2010. To begin with, India is self-sufficient in cotton – the 2.7 million tonnes of cotton consumed by its textile industry is all grown at home. China, on the other hand, imports a fifth of its cotton requirements. This is because of a disproportionate build up in the country’s weavings and processing capacities over the past few years. More important, the WTO agreement provides that countries can place filters if exports from China threaten to grow by more than 7.5 per cent for the next three years. There is no such provision against exports from India. This provides a window of opportunity for Indian exporters. There is evidence to suggest that the US textile industry is lobbying hard to block dumping of products from China. In December, the US government had imposed a quota on import of nine items from China following complaints from local textile industry.

11. Indian textile barrons admit investment done by them were too little and too late. Equally, China in exports is simply out of the question. Even the $ 50 billion target is ambitious. But this may not to take on competition from China in a quota from world. In fact, the expansion budgets of others are even smaller than Oswals. Investments in garments too are small. Raymond is putting up Rs 100 crore ($ 22 million) into these units for ready made garments in Bangalore. Arvind Mills, one of the largest integrated textile companies in the world, is investing Rs. 45-50 crore ( $10-11 million) to set up a denim factory in Bangalore with a capacity of 4 million pieces per annum and a trouser unit to produce 1.5 million pieces per annum. Again the numbers seems small compared with China’s Luen Thai, a Hongkong based garment manufacturing that has invested $ 50 million in the past year. The bottomline is very clear: while China has created large companies capable of executing large orders, Indian companies are still small.

12. The value of fabrics imports in India was almost Rs. 1,700 crore in 2003. About 70 per cent of this was used for exports. The exporters prefer imports because Indian mills they say do not have the capability to deliver and their fabrics is 15-20 per cent costlier than fabrics sourced abroad. Indian manufactures still ask for 90 to 120 days time to deliver 5,00,000 meters of fabrics. Chinese manufactures are able to supply one million meters in a short time. Also a large number man-made fabrics used for fashion garments are not manufactured in India. However, synthetic textile industry attributes this to the bias in the existing duties structure. As compared to cotton yarn which attracts 4 per cent basic excise duties, polyester filament yarn attracts 24 per cent excise duty. Various blended synthetic spun yarn also attracts more excise. Poly/viscose and 100 per cent viscose attracts 8 per cent, whereas nylon filament yarn attracts 16 per cent.

*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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