Current Economic Statistics and Review For the Week 
Ended March 12, 2005 (11^th Weekly Report of 2005)

  I

Highlights of  Current Economic Scene

Corporate Sector

New ventures

The Tata group is considering an entry into the areas of bio-tech applications in the pharmaceutical industry and drug research. The group embarked upon an exercise to “refresh” its corporate identity and hired international design agency Tower Partners LC for the purpose

Tata consultancy services is foraying into the drug discovery area. The IT major is about to bag its first project from a Europe-based drug discovery firm. This involves providing services using its bio-suite product, a software package for life sciences and biotechnology.

Steel Authority of India Ltd (SAIL) approved two projects, one for revamping of Sinter Plant-2 in Bhilai Steel Plant and installation of an air turbo compressor and an oxygen turbo compressor at the oxygen plant in Bokaro Steel Plant. The move will cost more than Rs 180 crore. With this, the total planned investment in different projects approved, both in-principle and final, during the current financial year stands at over Rs 2,500 crore.

Hindustan Petroleum Corporation Ltd (HPCL) has tied up with Air Deccan for setting up ticketing kiosks in its fuel stations. HPCL offered the space to the airline as part of the company’s sales promotion exercise for aviation turbine fuel. It has also approached other airlines with a similar offer. Air Deccan , on the other hand, views this as a non-traditional ticket distribution mechanism which will be key for its growth as it is now looking at spreading its operations to smaller locations.

National Hydro-electric Power Corporation (NHPC) is awaiting a go-ahead from an independent committee, before signing an equipment supply deal with Alstom for the Subhansiri project. The government had set up a panel headed by Central Electricity Authority Chairman, H L Bajaj, to probe the tender process for award of the tender for main plant equipment for the 2,000-megawatt lower-Subanshri power project in Assam . It was to submit its report by the first week of March.

Dishnet Wireless plans to install Wi-Fi and Wimax services next month across eight cities. The company will invest Rs 250 crore over a year on the project.

Czech car maker Skoda Auto will nearly double capacity in India and begin exporting to Bangladesh this year as part of its plan to use India as a regional hub.

Buoyed by its success in Chennai, TI Cycles of India plans to open 25 ‘Cycle World’ outlets in 6-8 major cities in the next one year.

Electrolux India plans to open 14 exclusive showrooms, managed and operated by women, by the end of 2006.

Mahindra Ugine Steel is planning to hike production capacity of its steel division to 2.40 lakh tonne per annum.

Hexaware Technologies Ltd bagged a $ 3 million multi-year contract from a Belgium based banking and insurance conglomerate.  

Texport Electronics Ltd, the Kolkata based Indo Swiss joint venture, is planning to make inroads into the coastal areas of the country with its AVI brand of air conditioners. 

Tyco group, world’s largest supplier of passive electronic components, plans to set up an anti-corrosion manufacturing company in India . 

Standard Chartered PLC is relooking at the operations of its captive business process outsourcing unit, Scope International.

Tata Motors, the country’s largest commercial vehicle manufacturer, launched its first complete range of fully-built buses, the Globus and Starbus.

 The civil engineering and construction business is booming, and multinational construction majors are making entry in to India . At least 10 foreign construction majors entered in the market within last six months. These include Limak from Turkey , Italian-Thai from Thailand , Baelim of Korea, Russian companies Boguchangesstroy and Soyuzgidroperesstroy, Dyckerhoff & Widmann AG from Germany , Malaysian companies IJM Construction SDN and Road Builders and Japan ’s Kajima and Taisei and Suzlon.

 Great Eastern Shipping continues its initiative to modernize the dry bulk fleet and to reaffirm its commitment to serve the dry bulk trade.

 Micro Technologies India entered into an agreement with Siemens AG of Germany for its pioneering R&D efforts and identifying new partners for the development of technologies in global markets.

 Policy issues

 Continuing its drive to discipline private telecom players, the government has asked the Tatas to show cause as to why their licence should not be cancelled for violating the norms for offering the push to talk services.

The government has turned down a proposal from the Dubai-based Flemingo International to sell its unsold stocks at duty-free shops to hotels and diplomats or re-export them. It has sought clarification from the company since allowing any such sale may amount to selling in the domestic tariff area which is not permissible to the company under current rules.

The finance ministry is considering a threshold staff strength for levying the fringe benefit tax on employers. Organisations with very few employees could be exempted from the tax. This is based on the assumption that small employers do not spend large amounts on fringe benefits.

Mergers & Acquisitions

ICICI Bank has increased its stake in Prudential ICICI Asset Management Company to 51 per cent, thus reducing Prudential Plc’s stake in the venture to 49 per cent from 55 per cent.

3i Infotech (formerly ICICI Infotech) is consolidating its overseas operations ahead of its initial public offering. The company plans to acquire the remaining 50 per cent in its joint venture Semantik Solutions GmbH, set up in mid-2002. In addition, the company is also merging its Australian subsidiary with its US subsidiary.

Bajaj Auto Ltd is expected to complete the acquisition of Western Maharashtra Development Corporation Ltd’s 27 per cent stake in Maharashtra Scooters Ltd. by June end.

Software solutions provider Zensar Technologies has entered into a partnership with the Japan-based Nomura Research Institute to launch a software migration solution called SITAR (Solution Initiative for Transformation and Reengineering). With SITAR, the company aims to transfer existing legacy systems to the open source platform.

Swiss cement  major Holcim’s twin open offer to the shareholders of Associated Cement Companies (ACC) and Ambuja Cement Eastern is delayed as the market regulator, the Securities and Exchange Board of India, is yet to clear the proposals.

The UB group bought out Kishore Chhabria’s 49 per cent stake in Herbertsons for Rs 131 crore, taking its stake in the company to around 93 per cent.

In a move to make a major foray into the booming Indian hospitality sector, InterGlobe Enterprises and European hotel chain Accor entered into a 60:40 joint venture envisaging an investment of Rs 850 crore over 10-12 years. The joint venture will develop 25 economy hotels, of which 20 such hotels will be opened in India , with the rest being developed in south-east Asia .

Following the success of its first budget hotel, indiOne, in Bangalore , the Taj Group of hotels is setting up 10 hotels across key destinations in the country. The ‘smart basics hotels’ as the company named this venture, is operated under Roots Corporation, a wholly-owned subsidiary of Indian Hotels Company (IHCL), which also owns the Taj Group.

Hindustan Construction Company approved a proposal to allow foreign funds to hold up to 49 per cent of the company’s equity. The company approved the sale of 2.91 million shares at Rs 450 each. 

The Shapoorji Pallonji-owned Forbes Group entered the realm of publishing and content by joining hands with HDFC to form next gen publishing. The Rs 3 crore company will be launching special interest magazines and other print products.

The Bennett, Coleman & Co Ltd media conglomerate that owns The Times of India, The Economic Times, and other newspapers and magazines, offloaded a 3.26 per cent equity stake in Mid-Day Multimedia, owner of Mumbai’s leading afternoon daily Mid-Day, a day after the Indian Express Ltd, the promoter of the Indian Express newspaper chain, picked up a 10 per cent stake in Mid-Day.

Drugs major Lupin, posted a turnover of Rs 1,168 crore in March 2004, is exiting or merging several associate and subsidiary companies in an attempt to streamline its corporate structure.

A few private equity investors evinced interest in picking up a stake in troubled laminates manufacturer Shree Rama Multi-Tech Ltd. The Ahmedabad-based packaging company, which is undergoing a restructuring plan, aims to repay its dues to banks and financial institutions.

Jindal Stainless which is near to acquiring an Indonesian unit, is eyeing further buyouts in Asia for backward linkages. The company was on an expansion mode and would endeavour to become competitive by having access to raw materials.

Henkel KgaA, the German consumer giant, will gradually launch more products from its global portfolio in India following the merger of Henkel Spic India with Henkel India Ltd. It is also demerging the marketing activity from the production activity in India .

Oil and Natural Gas Corporation (ONGC) is planning to buy a very large crude carrier (VLCC) to bring oil into the country from locations where it has equity oil. This will be India ’s sixth VLCC in two years. Until 2003, India did not own any VLCC. The one that was owned by the Shipping Corporation of India (SCI) was sold a few years ago.

Ashok Leyland is to transfer its castings business to Ennore Foundries for Rs 62 crore. The Rs 62 crore that Ennore Foundries is to spend, is a part of its Rs 227 crore investment to more than double its capacity to about 136,000 tonne over in the coming years.

Hutchison Telecommunications International Limited (HTIL) plants to continue looking for acquisition opportunities in India despite its failed attempt to buy Aircel, a mid-sized mobile operator in HTIL’s biggest and fastest growing market. Sterling Infotech group and Hutchinson Essar amicably ended their agreement wherein the former companies, Aircel and Aircel cellular, were to be acquired by Hutch. 

Company issues

Ranbaxy Laboratories Ltd’s research and development head, Rajinder Kumar, was the second research chief to leave the organization in a year. Kumar’s predecessor. Rashmi Barbhaiya, had left the company in 2004.

Liquor major Shaw Wallace and company informed the Calcutta High Court that it had reached an understanding with its creditors to settle Rs 57 crore outstanding dues.

In a relief to Reliance Infocomm, the Delhi High Court stayed the disconnection notice of state-owned MTNL over the issue of non-payment of levy  because of illegal routing of international calls.

IBM achieved the number one position in the overall server market India for 2004, as per the IDC’c Asia/Pacific Quarterly Enterprise Server Tracker.

After nearly 40 years at the helm of Bajaj Auto, Rahul Kamalnayan Bajaj, 66, will pass on the baton to his eldest son Rajiv Bajaj when he steps down as managing director of the company on March 31, 2005.

In a move to reflect its broader business canvas, Marico Industries Ltd proposed to change its name to Marico Ltd.

Indian lenders to the 2,184 Megawatt Dabhol power project are set to buy out the over $ 200 million debt exposure of the US Overseas Private Investment Corporation (Opic) to the Dabhol Power Company.

Divestment

Petronet India kicked off its divestment programme by seeking bids for the sale of the entire stake of the company.

Grasim Industries, the Aditya Birla group major exited the B K Birla group company Mangalam Cement. Grasim divested its entire 2.16 per cent holding in Mangalam through open market operations.

Tata Tea is transferring the ownership of 17 estates in Munnar to its employees. Workers have to spend a minimum amount of Rs 3,000for getting a stake in the new company. This transfer of ownership of around 50,000 acres of tea plantation of Tata Tea to a newly formed company is in the final stage.

  Inflation

The annual inflation based on wholesale price index rose to 4.95 per cent during the week ended February 26, 2005 from 4.83 per cent registered during the previous week. The annual inflation was at 5.21 per cent in the corresponding week last year.

The rise in the year-on-year inflation in the latest week was mainly on account of higher prices of fuel products and manufactured items including edible oils. The broad- based WPI was marginally down to 188.7 (Base: 1993-94=100) during the week in review as compared to the earlier week and it was registered at 179.8 in the year-ago period. The index of primary articles’ group declined by 0.4 per cent to 185.1 from 185.8 for the previous week due to decline in the prices of both, food and non-food articles. The index of fuel, power, light and lubricants group rose marginally as compared to the previous week, which stood at 289.0 due to higher prices of coke. The heavy-weighted (63.7 per cent) manufactured products’ group also rose marginally to 167.6 due to rise in the prices of food products, textiles, paper, rubber, non-metallic mineral products, basic metals and machinery prices.

The latest final index of WPI for the week ended January 1, 2005 has revised downwards both, the absolute index and the inflation rate to 188.5 and 5.72 per cent instead of the provisional levels of 188.6 and 5.78 per cent respectively.  

Banking

Credit Trends

During the current financial year up to February 25, 2005 gross bank credit increased by 21.8 per cent (exclusive of conversion) as compared with a growth of 12.5 per cent in the corresponding period of last year. The year-on-year growth of gross bank credit was 24.7 per cent (exclusive of conversion) as against 14.7 per cent on the corresponding date of the previous year. Non-food credit as on February 25, 2005 registered a growth of 23 per cent (exclusive of conversion) as compared with an increase of 15.4 per cent during the same period the previous year. The annual growth rate was 26.2 per cent (exclusive of conversion) as compared with 18 per cent on the corresponding date of last year. As on February 25, 2005 food credit registered a growth of 15.4 per cent as compared to a decline of 29 per cent during the same period last year. The annual growth rate was 14.4 per cent as compared to a decline of 28 per cent for the corresponding date of last year.

Other Banking Highlights

State Bank of India (SBI), the largest commercial bank has decided to opt for a differential payscale system on a priority basis, to attract fresh talent to the institution. The bank, to begin with, will avail of the provision of differential pay, as outlined in the autonomy package for the public sector banks, announced by the ministry of finance (MoF) recently.

PHD Chamber of Commerce and Industry (PHDCCI) has asked the Reserve Bank of India (RBI) to evolve a mechanism to facilitate medium and small-scale borrowers to get funds from various banks as they are charging different spread rates on prime lending rates (PLRs) which can go up to 4 per cent that are providing detrimental for the smaller borrowers to run their operations effectively. In a memorandum to RBI, PHDCCI has pointed out that as there is no uniform practice for charge of spread above PLR which depends on the credit rating of the borrower, the big blue chip companies are succeeding in getting funds at sub PLR due to large amount of borrowing but medium and small scale borrowers, inspite of having top ratings, are not able to negotiate best rates. PHDCCI has also suggested that banks should be given freedom to fix their own PLRs but no banks should be allowed to fix its PLRs exceeding a ceiling prescribed by RBI, say 8 per cent for all classes of borrowers.

The National Bank for Agriculture and Rural Development (Nabard) has stipulated that the 369 District Central Co-operatives Banks (DCCBs) and 30 State Co-operative Banks (StCBs) have to meet the twin criteria of net non-performing assets (NPAs) not exceeding 5 per cent of their net loans and advances and have capital to risk weighted assets ratio (CRAR) of 5 per cent for declaring dividend. Going by this norm, most of the DCCBs and StCBs will be precluded from declaring dividend due to their deteriorating state of financial health. The regulator observed that before taking a decision to declare dividends, managements of these banks, hitherto, had not taken into consideration the long-term perspective of strengthening internal resources and compliance with various statutory requirements. It also came across a few cases, where despite having substantial shortfall in provisioning in respect of their impaired assets, banks had declared dividends. According to the RBI’s latest Report on Trend and Progress in Banking, the financial position of most of the DCCBs and StCBs has not shown any perceptible improvement. The accumulated losses of DCCBs have increased to Rs.4442 crore in 2002-03 from Rs.3217 crore in 2000-01.

Insurance

State-owned Life Insurance Corporation’s (LIC) claim repudiation ratio — the claims that are rejected is lower than 1 per cent. Sources at Insurance Regulatory and Development Authority (Irda) have found out that private sector life insurers, on the other hand, have a repudiation ratio of over 13 per cent. LIC’s death claims were being settled within 21 days and the outstanding claims as on March 2004 were at their lowest ever at 0.13 per cent. A low repudiation ratio indicates that the insurer is paying all claims which are payable under the policy’s terms. However, the settlement of any insurance claim also involves interpretation of a lot of technical conditions, which are generally used by the insurers to reject the claims. A high repudiation ratio may also explain the fact that private life insurers have low claim records in the post-liberalisation period. The private life insurers have maintained that the Indian life insurance market is a profitable one and two of the life insurance companies — Bajaj Allianz Life Insurance and Max New York Life Insurance have already announced profits within the first three years of their operation. Globally, life insurance companies take six to seven years to break-even. LIC has centralised its claim processing system to manage over Rs 20,000 crore worth of claims out of the one crore policies annually. It is making efforts to bring its outstanding claims ratio to below 0.02 per cent in survival benefits (SB) and maturity and 1.5 per cent in death claims.

Telecom

As per the latest report of Telecom Regulatory Authority of India (TRAI) there was a marginal decline in the number of new subscribers to 2.11 million in February 2005 as compared to 2.16 million in January 2005. At the end of February 2005 the gross subscribers base consisting of fixed and mobile, has touched 97.03 million of which mobile subscribers accounted for around 51.44 million and fixed line subscribers about 45.59 million. As a result, the telecom sector has attained an overall tele-density of around 9 per cent as compared to 8.80 at the end of the previous month. Within the mobile segment, around 1.67 million new subscribers were added during February as compared to 1.77 million in January 2005. Of the additional subscribers, GSM accounted for 1.13 million and CDMA 0.54 million subscribers as against 1.27 million GSM and 0.50 million CDMA last month. In the fixed line segment a total of 0.39 million subscribers were added during February, which were predominantly WLL (fixed). With this the total subscriber base of fixed lines have crossed 45.59 million.

Global giant Nokia would set up a manufacturing plant in India with an investment in the range of $100 - $150 million.

Following a slew of complaints of service providers misusing their licences to offer wireless in local loop-fixed (WLL-F) services as mobile services, Telecom Regulatory Authority of India (TRAI) has written to all service providers to strictly comply with the licence conditions. Further, the regulator has also written to the department of telecommunications (DoT) seeking a clarification on the licence conditions that would ensure that there is no misuse of fixed line service phones.

Public Finance

Tax collections grew by about 18 per cent to Rs 1,54,663 crore till January 2004-05. This is two-thirds the budget estimate. The shortfall has been mainly due to reduced collections of corporate taxes and excise duties.

The fiscal deficit rose marginally by 1.7 per cent to Rs 1,03,801 crore till January 2004-05, which was 75.5 per cent of the budget estimate. Revenue deficit stood at Rs 79,622 crore during the concerned period. This has surpassed the budget estimate of Rs 79,622 crore for the entire fiscal year. However, the revenue deficit in the current fiscal year has been lower than the revenue deficit recorded last year. Government’s total expenditure in the first ten months of the current fiscal year stood at Rs 3,68,340 crore.

The all-India direct tax collection this year is likely to be around Rs 10,000 crore. The direct tax projection for this fiscal year ending March 31,2005 is about Rs 1,40,000 crore, which is 40 per cent more than last year’s collections. The marked decrease in the taxable income of oil companies and banks has resulted in a decline in corporate tax collections. While, profit margins of oil companies have been hit due to an increase in the global crude oil prices, banks have suffered due to a rise in interest rates, which has led to fall in bond prices and resultant booking of trading losses by banks.

Federation of Indian Chambers of Commerce and Industries (Ficci), has urged the finance minister to have another look at the corporate tax structure. According to the federation, while the reduction in corporate tax has been a positive step, the increase in surcharge and the continuing education cess causes an effective decline of only 3 per cent. Also, the introduction of fringe benefit tax (FBT) has also created discontent in the corporate sector. The nature of the levy appears to be that of ‘expenditure tax’. The federation had the following suggestions to make, - restore depreciation allowance and bring all services within service tax purview and prepare a negative list of utilities and basic services.

The Fringe benefit tax regime, which was introduced in the union budget for 2005-06 has been met with a lot of criticism. To soften the blow, the finance ministry is considering a threshold staff strength for levying the fringe benefit tax on employers. Finance ministry officials have indicated that organisations with very few employees could be exempted from the fringe benefit tax. This is based on the assumption that small employers do not spend large amounts on fringe benefits. The ministry will also consider combining the tax return for fringe benefits with the income tax returns to avoid the need for filling separate forms.

The finance ministry has notified a new rule to tax perquisites in the hand of employees. According to the new rule, the value of residential accommodation provided by an employer as a perk has been doubled from 10 per cent to 20 per cent. This means that the employees tax incidence will be doubled. However, in case of company cars, telephones, club fees and holidays the incidence has been made zero for the employees.

States have now been granted the leeway to exempt dealers with gross annual turnover of upto Rs 10 lakh from coming under the value added tax net. This is double the turnover ceiling of Rs 5 lakh that was proposed in the original VAT design. The latest decision would take out a considerable number of small dealers out of the VAT net.

The government will table a new bill to amend the law on direct and indirect taxes to clean all non-revenue provisions within the next two months. The Bill would include provisions on mergers and acquisitions and will aim at removing a maze of unnecessary provisions that hinder taxpayers and businesses

Capital Markets

Primary Market

The IPOs of Punjab National Bank and Gateway Distriparks Ltd (GDL) were oversubscribed by 15.7 times and 10.9 times, respectively.

In the three months of March, April and May, IPOs and public offers of more than Rs 8,000 crore are expected to tap the primary market. Among the important issuers are Oriental Bank of Commerce, Bank of Baroda, Allahabad Bank, Jaypee Hydro Power and 3i Infonet.  

Though the mutual funds have riased Rs 3,685 crore in the three months from December 2004 to February, they have invested only Rs 293 crore in shares as per the data released by the Sebi.  

Secondary Market

During the week, the BSE sensex surged to above 6900 mark to touch a lifetime high of 6954.86 on March 9, but failed to sustain the momentum as it closed the week at 6853.73 marginally higher than the previous week’s close at 6849.48. Similarly, the NSE nifty also registered a marginal rise of 5.85 points over the previous week’s close.  The on-going public offers have attracted considerable investors interest, thereby diverting funds from secondary market to primary market. Among the sectoral indices of BSE, metals, health care, consumer durables and bankex  indices rose, while BSE teck, auto, capital goods and FMCG registered decline. While BSE sensex rose by 0.1 per cent during the week, BSE 500 surged by 0.5 per cent.   

Till March 11, the net FIIs investment in equities has been Rs 14,397.60 crore ($3.3 billion) with purchases at Rs 52,017 crore and sales at Rs 37,619.40 crore. This inflow is second only to Taiwan in the emerging markets category; since January 2005, the net FII inflows in Taiwan stood at $ 4.2 billion.

The turnover on the Indonext, the BSE’s new trading platform, has risen from Rs 75 crore to Rs 140 crore since its inception in January. Also, the number of shares traded has increased from 1.5 crore to 2.6 crore. The top 100 gainers have registered a growth of around 36 per cent to 178 per cent.

Sebi has directed all public sector listed companies to ensure that at least 50 per cent of the board directors are independent directors. Non-compliance on this account could result in a delisting of the company from the stock exchanges. This clause is a part of clause 49 of the listing agreement, which comes into effect from April 1. Several PSUs are facing difficulties in complying with regulations; hence they have approached the Sebi and the government to reconsider the directive. 

Derivatives                                   

The F&O segment witnessed huge activity given the volatility in the cash market with an average daily turnover of around Rs 13,500 crore during the week.

Government Securities Market

Primary Market

Government of Maharashtra and Mizoram have offered on ‘tap’ 7.20 per cent 2017 for an aggregate amount of Rs 400 crore on March 14 for repayment of Rural Infrastructure Development Fund (RIDF) loans to NABARD.  

Under the debt swap scheme (DSS), states have replaced loans worth Rs 13,766 crore in the first year, Rs 44,566 crore in 2003-04 and Rs 41,668 crore in 2004-05. The tenth finance commission has recommended that a debt relief package linked to states enacting fiscal responsibility legislation prescribing specific annual targets to eliminate revenue deficits by 2008-09.  

Secondary Market

During the week, the call rates ruled in a narrow range of 4.73 –4.76 per cent and overnight CBLO rates ranged between 3.54 –4.95 per cent. The weighted average yield on 7.38 per cent 2015 eased from 6.61 per cent on March 4 to 6.56 per cent on March 11; as the market was assured the market that the inflation would be curtailed and interest rates would remain benign. In addition, a fall in global oil prices supported the positive sentiments.   

The government has said that the FII investment limit in government securities will be within a ceiling of $ 1.55 billion against $ 1.75 billion limit set earlier. The FII investment in corporate debt will remain within a ceiling of $ 0.5 billion.  

Bond Market

SBI is planning to raise tier – II capital worth Rs 3,000 – 4,000 crore to support the credit growth given the buoyancy in the credit off-take.

RBI has permitted Catholic to raise Rs 300 crore of tier – I capital over a period of two to three years. The permission to access the capital market is a reprieve for the bank, which had not been able to raise the capital due to a legal battle between the RBI and Enforcement Directorate on one side and on the other is Thai businessman S C Chawla.

The government is planning to relax the external commercial borrowings (ECB) policy framework by permitting government guarantee for loans from multilateral institutions; reviewing the end-use norms of ECBs

Foreign Exchange Market

Induced by the weakness in the US dollar, the rupee dollar exchange rate has appreciated from Rs 43.71 on March 4 to Rs 43.58 on March 11. Also, the six-month forward premia has eased from 1.71 per cent on March 4 to 1.46 per cent on March 4.

With a record US current account deficit threatening the stability of the US dollar, the RBI is also expected to reshuffle its portfolio by increasing the weightage of currencies other than dollar.  

Commodities Futures

NCDEX launched mild steel (MS) ingot contracts for futures trading on March 11.  It is expected that there would be Rs 90,000 crore trading volume in MS per year as the production size is huge and there are large number of buyers and sellers.

External Sector

Exports in dollar terms during April-February, 2004-05 is 27.03 per cent higher than during April-February 2003-04. This is substantially higher than the 15.46 per cent  during the previous year. In rupee terms, the exports were Rs 3,14,185.17 crore during April-February 2004-05 which is 24.40 per cent higher than the value of exports during April-February 2003-04.

Imports in dollar terms during April-February, 2004-05 is 36.33 per cent over the level of imports in April-February 2003-04. Oil imports is 44.45 per cent higher than that during the corresponding period of the previous year. Non-oil imports in dollar terms during April-February, 2004-05 is 33.36 per cent higher than the level of such imports in April-February 2003-04.

The trade deficit for April-February, 2004-05 is estimated at  Rs 11,487.94 crore  as compared to Rs 2,374.19 crore  in April-February 2003-04.  

Credit Rating

Crisil has assigned a P1+ rating to the Rs. 100 crore (enhanced from Rs. 50 crore) CP programme of Gruh Finance Limited. It has also reaffirmed AA/stable rating to the Rs. 150 crore NCD and FAA+/stable to the FD programme of the Gruh Finance. The ratings reflects the company’s improved and good asset quality, healthy capitalisation levels in relation to its asset-side risks and reasonably diverse resource profile.

Icra has assigned LAA+ rating to the proposed Rs. 150 crore long-term subordinated bonds programme of Kotak Mahindra Bank Limited. The rating continues to factor adequate capitalisation levels, improved financial performance and strong position in the commercial vehicle financing business.

In an another exercise, Icra has assigned LAAA rating to the Rs. 500 crore bond issue of National Thermal Power Corporation (NTPC), simultaneously, it has also reaffirmed the LAAA rating given  earlier to the Rs. 1500 crore bond issue of NTPC.

Care has revised the rating to BBB+ (so) from the existing A- (so) for the outstanding non-SLR bonds of Rs. 40.74 crore and Rs. 9.26 crore of West Bengal Financial Corporation (WBFC), respectively. The rating is primarily based on credit enhancement in the form of unconditional and irrevocable guarantee of the Government of Bengal for repayment of principal and payment of interest during the full tenure of such bonds.

In an another exercise, Care has assigned an AA rating to the existing tier-II bonds for Rs. 910 crore of Central Bank of India, the rating factors in the bank’s stable and low cost deposit base, increase in profitability supported by higher treasury gains and improving net interest income.

Standard & Poor’s rating services has assigned a foreign currency debt rating of BB+ for Indian Railway Finance Corporation’s proposed $125 million equivalent fixed-rate yen-dominated Eurobond due 2010

Theme of the week:

Metamorphic Changes in the Financial System

On the face of it, the Indian financial system and its structure consisting of institutions, instruments, markets and public policies guiding and regulating them, are expanding at a phenomenal pace, nursing rapid diversification and undergoing metamorphic changes. Full-fledged flow-of-funds accounts of the Indian economy are available only up to 1995-96 but the rapid growth and structural transformation have taken place thereafter as a consequence of the financial sector liberalisation. Traditional banking institutions are facing competition from insurance companies, capital-market-oriented institutions like the mutual funds and the capital market itself. Competition is also seen from private non-banking financial and non-financial companies on which, however, firm and comparable data are available only up to 1996-97. Despite these multiplicity of institutions, the traditional banks are holding on to their share of the total financial assets/liabilities in the system. The RBI data shows that the banks’ share in the total financial assets of banks and financial institutions has gone up from 64.5 per cent in March 1991 to 74.3 per cent in March 2004 (RBI 2004:317). These data are of course smudged by the merger effect of ICICI with ICICI bank; also it does not cover mutual funds and private sector insurance companies and NBFCs. A tentative estimate attempted by us by covering all these institutions shows that the banks’ share in total assets has slipped only fractionally from 64.5 per cent in March 1991 to 62.1 per cent in March 2004. But again, in the data set on household saving in financial assets, bank deposits as a proportion of gross financial savings has risen from 26.2 per cent in 1991-92 to 38.1 per cent in 2000-01 and to 42.8 per cent in 2003-04 – which speaks for the system’s constraints in diversification let alone disintermediation.

In terms of financial instruments, the change is more dominant, rather overwhelming, in secondary markets and their transactions. To make a crude comparison, aggregate money stock (M4) was Rs 20,29,071 crore at the end of 2003-04 or about 73.5 per cent of that year’s GDP at current market prices. This money stock is an outstanding figure cumulatively grown over years. On the other hand, four sets of secondary transactions (Exhibit A:below) – government securities, forex market, equity market and commodity exchanges – each one of them separately, have come closer to ( one of them has even crossed ) the size of India’s national income. Amongst them, the fastest growing are derivatives in the financial and commodity markets. Derivative contracts in the equity market may this fiscal year (2004-05) touch Rs 25,14,000 crore which would be equivalent to over 80 per cent of GDP at current market prices.

Urban-Centric Nature of Banking 

The bane of the financial system as it has grown in the 1990s is that it is increasingly becoming urban-centric. After the Reserve Bank of India gave up the policy of bank expansion programme in April 1995, the number of rural branches of scheduled commercial banks bas steadily declined from 32,981 in March 1996 to 31,999 in September 2004. This implies a loss in momentum to the extent of about 8,000 bank branches in rural areas. The number of bank branches in urban and metropolitan areas has significantly gone up in recent years.

As a result of the slowdown in branch expansion, the trend of decline in population per bank office has been arrested; in fact, there has occurred an increase in this measure precisely in the underdeveloped regions of the country (Exhibit B). 

The Narasimham Committee had recognised the need for continuing with the expansion of banking infrastructure in rural areas but in the process of executing financial sector reforms, the importance of rural financial infrastructure has got completely neglected. A great vacuum has got created in this area. Interestingly, even the Regional Rural Banks (RRBs), which were expected to serve the underbanked areas and which had 24 per cent of bank branches in March 1990, now have less than 22 per cent. In fact, their number has declined from the peak of 14,731 in March 1993 to 14,671 in March 2003 and this decline has occurred in rural branches.

Continued Tempo of Deposit Growth

An important feature of banking development in recent years has been the continuance of the tempo of bank deposit expansion even in rural areas (Exhibit C). This has happened despite the drastic reduction in the effective rate of interest on term deposits from 11.1 per cent in March 1998 to 8.0 per cent in March 2003. The public sector image of the banking system, combined with the absence of any effective social security system for the populace, and fluctuating nature of investment opportunities in the capital market, has retained the attractive nature of bank deposits even at longer maturity levels. 

It is found that 32 per cent in terms of the number of accounts and 24. 2 per cent in terms of the posit amount were with maturity periods of 5 years and above at the end of March 2003; the corresponding proportions at the end of March 1996 were 38.3 per cent and 32.3 per cent. 

In the ownership pattern of deposits, there are some distinct changes occurring, with a steady decline in the proportion of deposits attributable to the ‘household sector’ -roughly as defined for national accounts purposes. Such a change has occurred in both current account deposits (from 50.7 per cent in March 1996 to 48.9 per cent in March 2003) and in term deposits (66.9 per cent to 60.0 per cent), with saving deposits almost entirely held by the household sector. Interestingly, in the deposit ownership by private corporate sector, while financial sector companies have a declining proportion in current account deposits, non-financial companies have a rising share. In term deposits, both the categories have a rising share. 

Sectoral Distribution of Bank Credit
In regard to the trends in the sectoral distribution of bank credit, three features stand out. First, there has occurred a very sharp reduction in the shares of agriculture and small-scale industries, the two important priority sectors, in total bank credit after the 1990s . Second, the share of industry too has come down but it is essentially because of the loss of momentum in lending for the small-scale industries sector; the share of medium and large-scale industries has not come down in the1990s. The latter share in total bank credit, for instance, was about 37.2 per in March 1990 and it remained at 36 per cent in March 2003. Finally, the share of bank credit in favour of the services sector has shown a large and rapid increase in the last few years.

Sizewise Credit Distribution
The most conspicuous casualty in the aftermath of banking reforms has been the small-size loans . The number of loan accounts with credit limits of Rs 25,000 or less stood at 58.78 million in March 1991 accounting for about 23 per cent of bank credit outstanding, but it dwindled to 36.87 million in March 2003 or 5.4 per cent of credit outstanding. There may have been reasons for banks to clean up to some extent their books following the implementation of the loan waiver scheme and provisioning for bad debts amongst small loans. But, what is significant is that banks have made no attempt to increase the coverage of small loans in the 1990s, which has two other dimensions, namely, the step-motherly treatment of informal sectors and the neglect of underdeveloped regions. 

Credit-Output Relationships
In this 1990s, yet another sign of deterioration in the nature of bank credit distribution has been the steady fall in the ratio of bank credit outstanding to GDP originating in agriculture. The ratio was at about 13 per cent in the second half of the 1990s and reached as low as 8.3 per cent in 1996-97 or 8.6 per cent in the next two years. No doubt, in recent years there have been pressures on expanding credit delivery in favour of agriculture and the credit to output ratio for the sector has shown a significant improvement; the ratio has touched 13.7 per cent in for 2002-03.

The use of credit to output relationship for analytical purposes obviously faces some limitations, for bank credit is a stock concept while GDP is a flow. In the case of agriculture, there is substantial bank credit which corresponds to the sector’s production cycle and hence the comparison between output and bank credit may not appear to be way off the mark. For many other sectors, this may not be valid.

The attempt made to juxtapose state-level bank credit outstanding and state domestic product (SDP) for all the years in the 1990s, presents a mixed picture. First, overall, credit to SDP ratios have improved in respect of all states together in the 1990s (which was also true of the credit to GDP ratios presented in Table 13). Second, credit to output ratio has been the highest in the southern states and also it has improved over years over there. Third, such improvement has taken place even in underdeveloped regions. Lastly, in respect of some states like Maharashtra, credit appears far out of proportion to output because of metropolitan bank credit rendered in favour of housing and consumer loans not showing up in output.

*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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