Current Economic Statistics and Review For the Week 
Ended March 05, 2005 (10^th Weekly Report of 2005)

  I

Highlights of  Current Economic Scene

Infrastructure

The  Russian Government  approved modalities for merger between Rosneft -the State-owned oil company (excluding Yuganskneftegaz – main production unit of Yukos) and Gazprom- the natural gas monopoly, not only to restore state control over the energy sector but also  to create a national energy giant in Russia itself. The move  also paved the way to attract  Indian investment in the Russian energy sector through  development of  a number of Russian oil fields.  Incidentally, global oil prices escalated to breach  $53 a barrel on speculation that rising demand would outpace current production.

Global price of coking coal increased from $ 60 per tonne to $ 125 per tonne over the past year. Significantly, stock position at power stations fell from 14.8 million tonnes in March 2002  to 7.9 million tonnes in September 2004.  Although domestic coal production  registered a growth of 5.4 per cent, the  Union coal ministry projected  a  coal shortfall of  55 million tonnes during 2006-07  and  95 million tonnes in 2011-12,  as against an estimated  coal supply of  405 million tonnes  and  525 million tonnes, respectively.

Corporate Sector

Policy issues

Corporate tax rate pruned to 30 per cent from 35 per cent for domestic companies.

The government notified revised rules for the fringe benefit tax. With it, most perks are taxable at the hands of the employer instead of the employee. The exception is rent free accommodation.

Body shopping by IT companies is set to attract 10 per cent service tax, despite the sector being exempt from this levy. The finance minister’s decision to expand the scope of service tax on recruitment agencies to include even temporary supply of manpower will cover IT companies.  

The finance minister announced small changes in depreciation rates across several asset classes, the cumulative impact of which may result in a major change in profitability for corporates.

The Union budget had reduced custom duty from 15 per cent to 10 per cent on aluminium. The price cut would benefit the power generation and transmission industry which consumes aluminium in its conductors and overhead lines.

Maruti Udyog, Balco, Bhel, Oil India and Power Grid will be taken up for disinvestment in the next few months as part of efforts to raise Rs 5,000-7,000 crore in 2005-06.

Life Insurance Corporation of India will get about Rs 280 crore from the government for hiking its capital base and carrying out expansion.

Company issues

Boosted by the budgetary focus on accelerating infrastructure development, equity prices of construction firms including Jaiprakash Associates, IVRCL and Gammon India rose by 15-20 per cent.

LG Electronics is set to review its decision to set up a new facility at Ranjangaon near Pune for manufacturing GSM mobile phones, after the Budget imposed a special additional duty of 4 per cent on components.

Reliance Infocomm paid Rs 294 crore to the two public sector telecom companies, BSNL and MTNL as against the demand of Rs 504 crore for violation of interconnect usage charge agreement.

Honda Siel announced a reduction in prices by Rs 2,500 for the City and Rs 8,000 for the Accord with immediate effect. The company is passing on the 5 per cent cut in peak customs duty to the customers to be able to offer them enhanced value.

Mergers & Acquisitions

The government’s decision to allow 100 per cent FDI in construction resulted in real estate majors to consolidate operations. The Ajay Piramal group took the lead by merging its two real estate ventures under a single entity. The group merged Morarjee Realties and Piramal Holdings to form a new entity called Peninsula Land .

The promoters of Mid-Day Multimedia offered to sell 10 per cent stake to the Indian Express for Rs 25.5 crore.  The deal involves selling 42.57 lakh shares to the Indian Express at a price of Rs 60 per share.

The Rs 1,230 crore domestic pharmaceutical player, Lupin, is looking for an acquisition in the US before December 2005.

The Mahindra and Mahindra group sold 20.31 per cent of its stake in Mahnidra Gesco to a clutch of FIIs at Rs 139 per share in the first major deal in the real estate sector after the government liberalised overseas investment norms.

The private equity arm of Citigroup bought 7 per cent in Abhishek industries for about $ 10.3 million i.e., Rs 45 crore.

New Ventures

ONGC found large gas bearing structures at a depth of 2,450 metres in the G1 location of the KG basin. Initial testing indicates that this may have a potential of almost 4 trillion cubic feet of gas. The company won rights to develop deposits in Qatar that may hold as much as 300 million barrels of oil, gaining access to reserves as energy demand surges.

The government allocated Rs 325 crore to enlarge IA’s equity capital as and when the public sector company purchases aircraft.

Suzuki Motor Corp, a majority partner in auto leader Maruti, plans to introduce a new “crossover”model in India which it was developing in partnership with Italy ’s Fiat Auto.

Wipro Technologies plans to open its first software development centre in the Chinese capital. 

Escorts Ltd secured a $ 8.5 million export order from the Ghana government. The company has been asked to supply 400 tractors and other farm equipment. This order comes in the back of the 200 tractors it had exported last year. At present, Escorts has a 80 per cent market share in the Ghana tractor market.

State-owned Gujarat State Petroleum Corporation (GSPC) discovered a new oilfield in the onshore Tarapur oil and gas exploration block near Milarampur village in Anand district, near Ahmedabad.

Nokia would set up a manufacturing plant in India with an investment of around $ 100 million to $ 150 million.

In the next six months as many as 90 companies from Spain are planning to finalise investments in India .

Company results

General Motors India reported a 42 per cent rise in February sales at 1,859 units over the 1,309 vehicles  sold in February 2004.

Labour

Keeping in line with promises made in the UPA’s Common Minimum Programme, there are some promises kept by Finance Minister on job creation front. He said that the sectors with the job generating potential, like food processing, textiles and information technology would get  the highest attention. The food processing industry had been generating 2.5 lakh jobs every year; the textiles sector, especially after lifting the quotas from January 1 this year, also has the potential to create 12 million  jobs over the next five years. Expenditure on the National Food for Work Programme launched in November 2004, will be raised from Rs. 4020 crore to Rs. 11,000 crore for the year 2005-06, with the hike in the provision for components for the scheme- cash and grain at Rs. 5,400 crore and 50 lakh millions of foodgrain, respectively. Eventually, the government proposes to convert this programme into ‘National Rural Employment Guarantee Scheme’.

As regards the informal sector, which accounts for 92 per cent of the total employment, a National Commission on Enterprises had been set up. The Commission has proposed pilot projects by applying ‘Provision of Urban amenities’ (PURA) in rural areas with the objective to expanding production and employment in unorganized enterprises around existing industrial clusters. The government would also encourage new industrial cluster formation.    

Inflation

The annual wholesale price index-based inflation fell to a nine-month low to 4.83 per cent during the week ended February 19, 2005 from 5.01 per cent registered during the previous week. The rate of inflation was 6 per cent in the corresponding week last year. The fall in the year-on-year inflation was manly on account of declining prices of edible oils, vegetables and some of the manufactured products, according to the data released by the Ministry of Commerce and Industry. The WPI, however, remained unchanged at 188.8 (base: 1993-94 =100)  despite rising prices of primary items; prices of manufactured products have fallen even as fuel items stood firm for the second consecutive week. The index of primary articles’ group was up by 0.2 per cent to 185.8 due to rise in the prices of both, food and non-food articles. The index of fuel, power, light and lubricants group remained unchanged at previous week’s level of 288.9. The heavy-weighted (63.7 per cent) ‘ Manufactured products’ group declined by 0.1 per cent to 167.5 due to fall in textile, rubber, basic metals and machinery prices. The latest final index of WPI for the week ended December 25,2004 has revised upwards both the absolute index and the inflation rate to 188.5 and 6.56 per cent from the provisional levels of 188.2 and 6.39 per cent respectively.

Banking

The Reserve Bank of India (RBI) has now revised its stance; it has said  that the 10 per cent cap on voting rights in private banks would be removed and that foreign equity capital in a domestic private bank could be raised to 74 per cent. The central bank also said that foreign banks would be allowed an increased presence in India in two stages. The first phase starts in March 2005 and ends in April 2009. They can operate in India as branches, wholly-owned subsidiaries or as subsidiaries with a 74 per cent holding. After April 2009, foreign banks may be permitted to acquire any private bank. During this phase, wholly owned subsidiaries can list themselves and foreign banks may dilute their holding to the extend that at least 26 per cent of the paid-up capital is held by resident Indians at all times, in keeping with Press Note 2. The dilution may be either by way of an initial public offer or an offer for sale. But between March 2005 and March 2009, foreign banks will be permitted to take equity only in private banks that the RBI identifies for restructuring and be allowed to acquire a controlling stake in phases. Existing foreign banks will need to give up their branch licence should they opt for the subsidiary route. Foreign banks setting up wholly owned subsidiaries would need to have a minimum capital of Rs.300 crore, which is also the requirement for private banks. Where foreign banks apply to acquire 5 per cent and more in a private sector bank, the RBI will take into account the standing and reputation of the banks while giving its permission. The central bank may also specify that the investor bank makes a minimum acquisition of 15 per cent or more and the time for such acquisition. Any bank, including foreign ones, that has a shareholding in excess of 5 per cent in any other bank in India will be required to indicate a timed plan to reduce such investments to the permissible limit. This means that HSBC Bank will be required to bring down its stake in UTI Bank. At present, it holds about 14 per cent in UTI Bank.

A study by Icra on the impact of Basel II Accord on the Indian banking has shown that the banking sector would need additional capital to the extent of about Rs.11,900 crore to meet the capital charge requirement for operational risk under the new proposed regulation. Most of this capital would be required by the public sector banks (about Rs.9,000 crore), followed by the new generation private sector banks (about Rs.1,100 crore) and old generation private sector banks (about Rs.750 crore). The study has pointed out that the regulatory capital allocation for credit risk for Indian banks may decline by 2.4 per cent due to lower risk weightage requirements for better-rated credit exposures. For the retail credit, the existing norms of the RBI are tighter and would not require additional regulatory allocation.

Bank of India has extended free personal accident insurance cover to its home loan borrowers as per terms of the insurance policy obtained from National Insurance Policy Limited.

Dena Bank has set up Rural Development and Self-Employment Training Institute at Bhuj. This institute, among others, will cater to the training needs of the rural unemployed, artisans to enable them to start and mange their self-employed ventures.  

Insurance

The country’s largest life insurer, Life Insurance Corporation of India (LIC), will get about Rs.280 crore from the government for hiking its capital base and carrying out expansion. LIC had demanded capital infusion from the government to meet the stiff solvency norms as prescribed by the  Insurance Regulatory and Development Authority (Irda). The finance ministry has also decided to marginally hike the interest subsidy to Rs.269.2 crore to LIC for meeting additional cost of providing 9 per cent return to senior citizens under Varishtha Pension Bima Yojana.

Telecom

Despite the rise in tele-density to 8.2 per cent in 2004 from 2.32 per cent in 1999, India still lags far behind countries like Brazil and China , where the tele-density is over 40 per cent, according to the economic survey for 2004-05. India targets a tele-density of 20 per cent by 2008.

Telephone Connections in Million

                        Figures in brackets are percentages to Total.

In order to increase the tele-density, the Economic Survey has suggested pro-competitive efforts in the form of public policy, new technologies, entry of new players and lower tariffs. However, India is much ahead of tele-density compared to neighboring countries like Pakistan , Bangladesh and Nepal but behind Sri Lanka . The Survey suggests that the recently launched broadband services are likely to become cheaper with the rise in volume and competition. The broadband policy aims at 3 million broadband subscribers and 6 million internet subscribers by end of 2005.

Information Technology

Syntel ( India ) Ltd., the wholly-owned subsidiary of the US-based Syntel Inc., a global applications and business process outsourcing (BPO) enterprise, plans to invest around $20 million in its Indian operations during the current year. Out of the projected outlay, the company plans to invest close to $12 million on building a four-lakh sq. ft. facility in Pune with a seating capacity for 9,000 people. Syntel is also setting up its own campus on Chennai’s IT corridor. The company has acquired over 28 acres of land near Chennai for a cost of around $1.5 million.

Syntel ( India ) Ltd., the wholly-owned subsidiary of the US-based Syntel Inc., a global applications and business process outsourcing (BPO) enterprise, plans to invest around $20 million in its Indian operations during the current year. Out of the projected outlay, the company plans to invest close to $12 million on building a four-lakh sq. ft. facility in Pune with a seating capacity for 9,000 people. Syntel is also setting up its own campus on Chennai’s IT corridor. The company has acquired over 28 acres of land near Chennai for a cost of around $1.5 million.

Public Finance

The Union budget for 2005-06 has announced significant reductions in tax rates for both direct and indirect taxes. However, due to increase in additional excise duties and surcharges, the impact of tax may not change drastically. An important step taken by the finance minister was the introduction of fringe benefits tax. The basic thrust of the budget this time has been to increase revenue collection by widening the tax base. Also, the finance minister’s attempt to tax money being withdrawn from banks in cash was widely

Income tax

Income tax slabs have been changed as follows.

The ten per cent surcharge will now applicable to incomes beyond Rs 10 lakh instead of Rs.8.50 lakh.

The exemption level for women has been raised to Rs 1.25 lakh, while for senior citizens; it has been raised to Rs 1.5 lakh.

All taxpayers are now allowed a consolidated saving limit of Rs 1 lakh, which will be reduced from the income before tax calculations. However all other sectoral caps have been removed and the rebates under Section 88 and 80 L have also been removed.

Fringe benefits enjoyed collectively by the employees, not attributable to individuals, are  to be taxed in the hands of employers. This tax has been fixed at 30 per cent and is to be called as fringe benefit tax. However; transport service for staff and canteen service are to be out of the fringe benefit tax net.

Corporate tax

Corporate tax has been reduced from 35 per cent to 30 per cent. The surcharge has been maintained at 10 per cent.

General machinery and plant to attract depreciation at 15 per cent, but the initial depreciation rate has been hiked to 20 per cent. Also, the requirement of 10 per cent increase in installed capacity for availing tax benefit of initial depreciation has been removed.

Withholding tax on technical services has been reduced from 20 per cent to 10 per cent.

Securities transaction tax (STT) has been raised from 0.015 per cent to 0.02 per cent for all categories of transaction. Trading in derivates in specified stock exchanges is not to be treated as speculative transactions for income tax purpose.

Excise

The annual turnover ceiling for claiming exemption for Small Scale industry has been raised from Rs 3 crore to Rs 4 crore

More good have been brought under the Cenvat tax rate of 16 per cent, which include air conditioners, tyres, tubes and flaps, polyester textured yarns.

Excise duty has been raised on iron and steel of chapter 72 from 12 per cent to 16 per cent.

Excise duty has also been raised on ships for breaking from 12 per cent to 16 per cent. Molasses will now attract an excise duty of Rs 1000 per metric tonne.

Excise duty of Re 1 per kg on refined edible oils and Rs 1.25 per kg on vanaspati oil has been exempted. Additional excise duty of Re 1 per kg on tea has been abolished.

Duty rates on cigarettes has been raised by 10 per cent.  Ten per cent surcharge has been imposed on ad valorem duties on other tobacco products including gutkha, chewing tobacco, snuff and pan masala

Petroleum

Basic excise duty rates on certain petroleum products has been revised as shown below:

Customs

Peak rates of customs duty on non-agricultural products has been reduced from 20 per cent to 15 per cent. The ad valorem component of customs duty on textiles fabrics and garments has been reduced from 20 per cent to 15 per cent. Customs duty has been reduced from 15 per cent to 10 per cent on primary and semi-finished forms of the following metals: stainless steel, other alloy steel and ferro-alloys; aluminium, copper, zinc and base metals.

Customs duty on agriculture and food processing:

Customs duty on cloves has been reduced from 70 per cent to 35 per cent.

Concessional rate of 5 per cent customs duty+ Nil CVD presently available to plantation machinery upto 30.4.2005 has been extended by one more year.

Customs duty on cut flowers has been increased from 30 per cent to 60 per cent.

Customs duty on crude petroleum:

      Customs duty on Crude petroleum has been reduced from 10 per cent to 5 per cent

Kerosene for public distribution system from 5 per cent to nil

LPG from 5 per cent to nil

Other petroleum products from 20 per cent to 10 per cent.

Customs duty on Chemicals and petrochemicals:

Custom duty on polymers has been reduced from 15 per cent to 10 per cent.

Customs duty on the following chemicals has been reduced from 10 per cent to 5 per cent – ethylene, propylene, butylene, benzene etc.

Customs duty on industrial ethyl alcohol has been reduced from 15 per cent to 10 per cent.

Custom duty on capital goods:

Customs duty on railway locomotives, railway rolling stock and railway equipment has been reduced from 20 per cent to 10 per cent.

Concessional rate of customs duty available to specified goods designed for use in leather/footwear industry has been extended to 7 more specified machinery.

Customs duty on specified parts of printing press has been reduced from 20 per cent to 10 per cent.

Customs duty on specified textile machinery, and raw materials and parts for manufacture of such machinery has been reduced from 20 per cent to 10 per cent.

Others

Tax of 0.1 per cent on cash withdrawal from banks of over Rs 10,000 in a single day.

Banks are now supposed to report all deposits exempt from TDS on interest.

Large taxpayer units (LTUs) to be set up in major cities.

Capital Markets

Primary Market

Gateway Distriparks Limited (GDL) has offered to sell 210 lakh shares, which consists of fresh issue of 110 lakh shares and an offer for sale for 100 lakh shares. The offer is made through 100 per cent book building process for a share of Rs 10 each in a price band of Rs 60 to Rs 72 per equity share. The offer constitutes 28 per cent of the fully diluted post-offer paid-up capital of  GDL.  

Emami’s offer for sale of 50 lakh shares of Rs 2 each at a price to be determined through book building process in a band of Rs 60 to 70 per share. The issue opened on March 4 and on the first day of its public offering, the issue was oversubscribed by about 8.7 times. This issue has been made primarily to comply with the clause 40A of the listing agreement, which requires corporates to have a minimum of 10 per cent stock holding outside the promoter group.

The price band for the upcoming Punjab National Banks (PNB) equity issue has been set between Rs 350 and Rs 390 per share. It is mandatory that in any offer for sale, the price band should be at a minimum 10 per cent discount to the current trading price.   

Secondary Market

As the budget was announced, the stock market indices began responding favorable to it; the BSE sensex opened at 6584.34 and touched an all-time high of 6721.08 before closing the day at 6713.86 points and the NSE nifty also gained 42.35 points to close at 2103.25.

The average combined total turnover of BSE and NSE jumped from Rs 7134.07 crore on Friday 25 to Rs 9339.75 crore. The market breadth was positive, with 1342 advances against 1058 declines.  On the next day, as the market participants deciphered the budget announcements in detail, the BSE sensex fell by 62.8 points to close at 6651.1 as the market was worried about the fringe benefits tax and the 0.01 per cent tax on cash withdrawals above Rs 10,000 per day from banks. But as the finance minister assured the market that these issues would be revised further, the market regained its bullishness. On the last trading day of the week, the BSE sensex breached the earlier high and scaled to yet another peak of 6849.48 points and NSE nifty jumped to 2152.75, as FIIs continued to invest in domestic equities. Positive sentiments were witnessed across the board and all sectors saw buoyant investors interest. 

Among the sectoral indices of BSE, BSE Metal, Bankex, BSE capital goods, BSE PSU and mid-cap indices touched their new all-time highs on Friday March 5.

Till March 5, FIIs had a net investment of Rs 1947.10 crore in just four days of the month with purchases at Rs 5114.50 crore and sales at Rs 3167.40 crore.

Sebi has permitted bank guarantees and fixed deposits as equivalents for the margin payment towards margin trading; at present, only cash is allowed.   

Sebi has issued a circular to all mutual funds stating that all investments in securitiesd debt by mutual funds have to be bought from different originators and not different issuers or special purpose vehicles of the same originators.

 The stock markets were bullish as the hike in securities transaction tax in the latest budget for 2005-06 was as per the market expectation. Also, derivatives income has not been treated as speculative income. Introduction of gold unit exchange traded mutual funds would provide investors yet another investment option and also participate in the on-going bull run in gold prices.The mutual funds are expecting that there would be increased inflow, as the investors would put their savings in these units due to the changes in income tax exemptions. 

Derivatives                                  

The FIIs in derivatives segment have been allowed to submit securities as collateral for upfront margin payment as against the present system of paying cash. As a result, the turnover in the derivatives market rose to a high of Rs 19,440.7 crore on February 28,2005, thereafter the volumes have been lower in the range of Rs 10,988.3 crore to Rs 14,143.40 crore. 

Government Securities Market

Primary Market

Along with normal borrowing under the Market Stabilisation Scheme (MSS), the Reserve Bank of India mopped up to Rs. 1,500 crore and Rs. 1000 crore through 91-day T-Bill and the 364-day T-Bill respectively. The cut-off yield for the 91-day and 364-day T-Bill was 5.2006% and 5.6119% respectively.

Secondary Market

Following the budget announcement, the yields firmed up with the yield on 10-year benchmark rose from 6.46 per cent on February 25 to 6.62 per cent on February 28. As the market participants became worried about higher than expected governments borrowing programme, as the finance ministry officials assured the market that the borrowing would be lower than the projected figure. The market, however, was relieved as the inflation continued its falling trend by easing further to 4.83 per cent, a 40-month low, in the week ended February 26.

With call rate rates ruling below the RBI’s reverse repo rate of 4.75 per cent, there have been ample arbitrage opportunities for the market participants. As a result, the daily average outstanding amounts in the reverse repo hovered around Rs 39,000 crore.  

Bond Market

The budget has taken a decision to redefine securities by amending Securities Contract (Regulation) Act (SCRA) 1956 to provide a legal framework for trading of securitised debt including mortgage-backed debt over the counter.

Foreign Exchange Market

During the week, the rupee dollar exchange rate has moved in a narrow range between Rs 43.64 and Rs 43.72 as the RBI continued to modulate the currency movements. The six-month forward premia has firmed up from 1.62 per cent on February 25 to 1.71 per cent on March 4.

Commodities Market Derivatives

The Multi Commodity Exchange (MCX) has launched futures trading in castor seeds with the contracts maturing in March and April. The trading and delivering unit has been set as 10 metric tones and price quotation has been set per 20 kg.

The National Commodity and Derivatives Exchange (NCDEX) has recorded the highest volume of Rs 2,842 crore on March 2; of this guar seeds accounted for 24.8 per cent of the total volume, followed by Soya oil at 22.6 per cent.

As per the data put out by the Forwards Market Commission (FMC) for the two fortnights ending February 15 and 28 (which has been done for the first time), the turnover of MCX and NCDEX has risen from Rs.689.06 crore to Rs.1036.9 crore, respectively on February 1 to Rs. 1190.91 crore and 1796.63 crore, respectively, on February 28.

External Sector

Service providers enjoying a service tax exemption on payments received in foreign exchange will have to start paying a service tax from March 15. An exemption from service tax will be given only where services are actually exported. Broadly, export is defined based on the location of the buyer. The recipient has to be outside the country.

The Finance Minister initiated move to generate foreign direct investment (FDI) in the pension sector. This would allow effective utilization of the global expertise and experience to channelize the long term resources for the development of the sectoral infrastructure.

Credit Ratings

Crisil has assigned AAA rating to seven issues  (RMBS6, Nivas, Mortgage Securitisation Trust, Indian Home Loan Trust, Griha Trust, Aawas Trust and Retail Residential Trust) of MBS backed by housing loan receivables organised by ICICI bank. The ratings are based on the strength of the credit-quality of the pool cash flows, ICICI Bank’s servicing capabilities, the credit enhancement mechanism and structural features the transaction.

Icra has assigned an LAA+ rating to the proposed Rs. 500 crore subordinate bond programme of UTI Bank. It has also upgraded the LAA ratings on the outstanding subordinate bonds of UTI Bank to LAA+. The rating upgrade factors in UTI Bank’s improving core profitability, healthy growth in fee income, focus on strengthening its asset quality, an improving retail franchise and IT-enabled infrastructure and the proposed equity capital infusion through a Global Depository Receipt (GDRs).

In an another exercise, Icra has assigned LAA+ rating to the proposed Rs. 50 crore long-term subordinated bond of Kotak Mahindra Bank. It has also retained the fixed deposits of East India Pharmaceuticals works at MA.

Care has assigned an AA- rating to the proposed Rs. 10 crore NCD issue of Transport Corporation of India , the rating factors in the company’s record in terms of growth, dominant position, wide network and established clientele. The rating is, however, constrained by the company’s moderate profitability due to limited pricing flexibility, high competitive pressures and working capital intensive growth.

Fitch has assigned an F1+( ind ) rating to the Rs. 1000 crore short-term debt programme of Reliance Energy (REL). The AAA ( ind ) rating assigned to REL’s long-term debt programme has been affirmed.

Theme of the week:

Saving and Investment Estimates – Time to Take a Fresh Look

The Central Statistical Organisation (CSO)’s latest quick estimates of national accounts for 2003-04 have made a dramatic change in the image about the Indian economy’s saving rate.The country’s macroeconomic scenario has been upgraded from a one with relatively low and stagnant domestic saving to a high and rising saving rate.  According to these estimates, the domestic saving to GDP ratio, which was generally hovering around 24-25 per cent for seven  years from 1994-95 to 2001-02, has made a quantum leap from 23.5 per cent in 2001-02 to 26.1 per cent in 2002-03 and further to 28.1 per cent in 2003-04 (Table1).  Though the 28.1 per cent saving ratio is far removed from the levels of 35 to 40 per cent in China and other east and south-east Asian economies, if the estimates do present a  realistic picture they radically alter the developmental potential of the economy. No doubt, for the present this high-saving image is blurred by the fact that the Indian economy is not able to fully absorb  its domestically generated savings and there is the unusual spectacle of a capital scarce economy like India continuously exporting sizeable amounts of capital for three years in succession from 2001-02 to 2003-04.  The estimated saving rates have exceeded domestic investment rates in these years, which is a reality and which is reflective of the number of structural and institutional factors afflicting the Indian economy.  But, before one addresses this wider issue of macroeconomic perspectives and interpretation of numbers, there is the need to examine if the numbers themselves portray a realistic picture.  In fact, a closer examination of these numbers suggests that they project an exaggerated scenario of high domestic savings and investment. The numbers themselves are the result of a faulty system of estimation which was to be discarded long ago.  The latest estimates thus seem to reopen the many misgivings that the estimation procedures had raised in the past. 

Sizeable 2002-03 Revisions

To begin with, what appears intriguing is the sizeable and wide-ranging revision that has been effected in the saving and capital formation estimates for 2002-03 from their last year’s quick estimates stage to the latest provisional estimates.  As shown in Table 2, last year when quick estimates were prepared for 2002-03, the absolute size of total gross domestic saving was placed at Rs.597,697 crore or 24.2 per cent of GDP.  For the same year, the revised provisional estimates now place the  size of saving at Rs 642,298 crore or 26.1 per cent of GDP, that is, as much as Rs 44,601 crore higher; this upward revision works out to 1.8 percentage points of the revised GDP.

Amongst the components, the largest revision has been effected in public sector savings (Rs 19,078 crore) followed by household savings (Rs 15,423 crore). In household savings, estimates of saving under financial assets have not been altered; instead, the entire revision under household savings has occurred in physical assets formation.   This upward revision in household saving in physical assets also appears under capital formation as both are treated as identical components in the estimation procedure.  As for capital formation estimates, the 2002-03 revisions in respect of public sector and private corporate sector have not been sizeable. Also, whatever revisions have been made in them, they are downward revisions which are, interestingly, contrary to sizeable upward revisions effected in the saving estimates of these two organised sectors.  With the household financial savings remaining unaltered, these divergent results in the revision of saving and capital formation estimates of public and private corporate sectors alone are responsible for effecting a sudden jump in the revised figures of ‘errors and omissions’ for 2002-03, from Rs 11,217 crore as per quick estimates (0.4 per cent of GDP) to Rs 52,330 crore (2.1 per cent) an upward revision of as much as Rs 41,113 crore or 1.7 per cent of revised GDP (Table 2).  

Unusual Size of ‘Errors and Omissions’ 

The ‘errors and omissions’ referred to above, represent the difference between two independently estimated macro variables, namely, (i) gross domestic saving plus foreign capital inflow which together constitute finances for capital formation, and (ii) the actual gross domestic capital formation.  These ‘errors and omissions’ have further galloped from Rs 52,330 crore in 2002-03 to Rs 91,174 crore or as much as 3.30 per cent of GDP in 2003-04.  Such a large magnitude of inexplicable discrepancies obviously raises misgivings on the quality of estimates themselves.  However, these misgivings are not knew; they were discussed threadbare over two decades ago in early 1982 in the Report of the Working Group on Savings (Chairman: K N Raj) and a major recommendation  made by that working group, accepted by the government and even claimed to have been implemented, remains unattended to by default even today.  This requires some elaboration but before that, a review of the latest trends in saving and investment would be useful as a prelude to the proposed  discussions on estimation issues.

What Official Estimates Portray

The CSO’s latest estimates on saving and investment provide many interesting revelations.  Two of them,  namely, high and rising domestic saving rates, and the dramatic revisions for 2002-03 which may be true of even earlier years1, have already been referred to.  The third revelation is that while the gross domestic saving ratio has galloped during the past two years and reached 28.1 per cent in 2003-04, the independently estimated gross capital formation (unadjusted) has remained stubbornly at about 23 per cent  - to be specific 22.7 per cent in 2002-03 and 23.0 per cent in 2003-04.  Curiously, even while the 2002-03 saving ratio has been radically revised upwards, the revision of capital formation numbers has been downwards - though marginally from Rs 563,816 crore or 22.8 per cent of GDP to Rs 557,958 crore or 22.6 per cent.  A final significant revelation is that because of the large amount of ‘errors and omissions’ as described above, the adjusted capital formation estimates move up from 24.8 per cent of  GDP in 2002-03 and further  to 26.3 per cent in 2003-04.

These new estimates, therefore, project a scenario of 28 per cent of domestic saving ratio and 26 per cent of capital formation ratio – both showing a significant improvement over the recent past.  As stated above, a critical look at the estimation procedure does suggest that this buoyant scenario calls for correction.  Again, before we make this assessment, the sectoral trends in saving and capital formation  estimates have their own lessons.

Composition of Household Savings

As has been emphasized in literature, the weakest elements in saving-investment data are the household savings in the form of financial as well as physical assets (Raj Working Group Report 1982:8).  Household savings constitute over 85 per cent of the total domestic savings, and it is found that both the major components have experienced a rising trend in recent years – financial assets from 10.4 per cent in 1998-99 to 11.4 per  cent in 2003-04 and physical assets rather more sharply from 8.4 per cent to 13.0 per cent (Table 4).  As is widely known, household saving estimation involves the “residual” method, and there can be significant sources of errors in these estimates, as explained below.

Public Sector Savings

As presented in Table 5, there have been sizeable reductions in dissavings of the public sector in recent years.  The CSO has been revealing that they have come to possess fresh/additional data from 2000-01 onwards and also undertaken revision of the savings of quasi-corporate and quasi-government bodies, though the details of these changes are not known.  But, a question that requires some explanation is as to why better coverage of the public sector institutions has resulted in only an improvement in public sector savings and not in public sector investment.  The Raj Working Group (1982), which had examined this question, had come to the conclusion that there would be symmetry in the estimates of saving and capital formation of the public sector whenever there are improvements in coverage.  Very often, the question in the case of the public sector, particularly in respect of public authorities, is one of determining precisely how much of the expenditure shown under different heads is really on capital formation and how much on current consumption.  Any change effected by such assessment “would affect estimates of capital formation and of saving almost symmetrically” (Raj Working Group Report 1982: 7).  Contrariwise, even as public sector dissavings have shown a steady decline, there has not been any corresponding rise in the capital formation estimates of the public sector. In fact they have persistently declined (Table 5).

Table:5: Public Sector Savings: Break-up by Type of Institution                             (Rs.crore)

Note: Figures in brackets are percentage to GDP at current market prices.

@: Revisions if any made for years prior to 2002-03 are not known.

P: Provisional  Q: Quick estimates.

Misgivings on Saving and Capital Formation Estimates

There are three distinct sets of misgivings regarding the estimates of saving and investment in India which have been highlighted  in literature  and which have come to the fore with the CSO’s new estimates.  The first one concerns the possibility of vast amounts of float funds arising from foreign remittances by foreign institutional investors (FIIs) and others partaking the character of household savings in the form of currency, bank deposits,  shares and debentures of corporates and such other financial instruments.  This is occurring because the proportions attributable to the household sector are a  “residual” obtained from end-year stocks of financial assets.   The phenomenon is found to be conspicuous in years when foreign currency inflow are sizeable  as the ownership of financial assets as between public, private corporate and household sectors in recent years is difficult to discern (EPWRF 1995). Data in Table 4 provide corroborative evidence in this respect. Overall, there is a distinct possibility of household saving in financial assets being inflated because of the above phenomenon of large float funds which is not attributable to the household sector.

The second issue concerns the possible errors, as explained above, in the estimation of capital formation in public and private corporate sectors.  This issue has also been discussed at length in literature (EPWRF and NCAER 2003).  A substantial improvement in the ratio of household saving in physical assets (Table 4) has occurred in recent years when public sector and private corporate sector investments have experienced steady declines.  In this respect, there is evidence of a “stylised fact” that a rise in corporate sector gross fixed asset formation is almost always followed by a fall in household physical assets formation or vice versa (Graph A) (See also Joshi and Little 1994 and  Athukorala and Sen 1995).   These, in other words, give considerable corroborative evidence that the recent household saving estimates in physical assets formation have probably been an overestimates.

Finally, there was a categorical recommendation in the Raj Working Group Report that ‘errors and omissions’ referred to above be dispensed with and instead, they  be relegated to a separate column or row as “statistical discrepancy”.  To quote the Report:

“           Treatment of ‘errors and omissions’ as ‘statistical discrepancy’

            The Working Group felt it necessary to dilate a great deal on the nature of the ‘errors and omissions’ now emerging in the process of reconciling the CSO’s estimates of domestic saving, foreign inflow and capital formation arrived at with the help of divergent methods and disparate sources of data (See Chapter 2).  The Working Group considers that the present method of treating ‘errors and omissions’ as though they take care of all of the estimational errors and as though they are related to all sectors is somewhat erroneous.  Besides, the present method has created a serious analytical problem in the sense that no consistent sectoral shares in gross or net capital formation could be worked out.  This is so because while the adjustment for ‘errors and omissions’ is made at the aggregative level, no such adjustment is made at the sectoral level.  An alternative which the Working  Group recommends is that the ‘errors and omissions’ be treated as ‘statistical discrepancy’ and that no adjustment whatever be made to any of the independent estimates” (ibid, p.128).

Subsequently, the Expert Group Report on Saving and Capital Formation (Chairman V.M. Dandekar/Raja J. Chelliah 1996), had reported that “the recommendation has been implemented and the term ‘errors and omissions’ has been substituted by the term ‘difference’ ”   (p.52).  But, curiously, the system of   ‘errors and omissions’ remains unchanged even to date.