Current Economic Statistics and Review For the Week 
Ended March 19, 2005 (12^th Weekly Report of 2005)

  I

Highlights of  Current Economic Scene

Infrastructure

The OPEC oil cartel decided to increase the daily crude supply by 2 per cent and production limits by 5,00,000 barrels a day to 27.5 million barrels per day with effect from April 1, 2005 to contain price surge. Meanwhile, global crude oil price soared to an unprecedented U.S.$ 57.60 a barrel.

The Ministry of Power stipulated 2010-11 as the deadline for all states to trim the existing cross subsidies to equal to 20 per cent of the average cost of power supply. For instance, if the average cost is Rs.3 a unit, the highest and lowest tariff per unit allowed is Rs. 3.60 and Rs.2.40, respectively.

The Government of Maharashtra offered 100 per cent exemption from stamp duty and registration charges and a complete waiver in octroi fees for machinery and other equipments, quick clearance and provision of essential infrastructure for setting up power units by independent power producers and also volunteered to purchase power at a rate fixed by the Central Regulatory Power Commission. 

Indian steel majors agreed to share research and development data to bring down the cost of production of steel and reduce energy consumption just as global steel majors decided to set up their units in India. Meanwhile, Tata Iron and Steel Company (TISCO) announced its plan to increase steel prices from April 2005. 

CORPORATE SECTOR
Company issues
The argument over the change of name for Bajaj Tempo Ltd (BTL) has taken a serious turn with Bajaj Auto Ltd (BAL) seeking a stay on the extraordinary general meeting called on April 5, 2005 to approve the change of name to Force Motors. BTL had decided to change its name after Daimler Chrysler which owns the Tempo name sold its stake. BTL said that it was doing so under the government’s order. However, BAL contends that the Bajaj name cannot be dropped as it holds a 24 per cent stake in the company. 

Wipro BPO has decided to bench around 200 young employees at its Kolkata centre. The reason is that customers of Dell PC brand are making fewer calls ever since Dell began charging customers in Europe and the US for calls. 

Idea Cellular has a debt component of Rs 4,000 crore and the objective of refinancing this debt is in line with reducing its interest burden. The company’s key shareholders have initiated the process. 

India Inc has moved towards depository receipts. This is on account of the rise in the US interest rates, which has to an extent made foreign currency convertible bonds costlier for companies. Besides, companies are now moving towards a more equity-oriented capital structure. 

During February 2005, 18 debt instruments were floated by corporates to raise Rs 4,735 crore, the highest amount raised in a month in fiscal 2004-05. 

Automobiles
Bajaj Auto is considering legal action against certain Chinese companies who are copying the design of its bestselling Pulsar and three-wheeler models. 

Tata Motors is considering a price hike of 2-3 per cent across its range of vehicles in April due to rising input costs. 

Following the increase in steel prices, carmakers are gearing up for another round of price hikes, with Maruti Udyog Ltd and General Motors increasing prices for their products. 

Pharmaceuticals
The introduction of product patents in India has resulted in leading domestic pharma corporates to enhance their sales force considerably. Overall five pharma majors viz., Nicholas Piramal, Sun Pharmaceuticals, Ranbaxy, Lupin and Unichem have increased their sales force by around 3,000 employees. 

With a rise in competition in the domestic market, Indian generic drug manufacturers are exploring opportunities in Latin America. Leading Indian drug manufacturers like Ranbaxy, Wockhardt and Strides Arcolab have already established their presence in Latin American region. Many other mid-sized generic makers are now keen on following suit.

The representatives of around 25 global generic pharmaceutical companies were in India in previous week looking for various alliances, potential mergers and acquisitions in the Indian drug market. Over 400 meetings were held between the representatives of MNCs and Indian companies and around 30 deals are believed to have been signed. This was part of the generic drugs conference organized by ABN AMRO Bank in Mumbai. 

Policy issues
National Pharmaceutical Pricing Authority (NPPA) has proposed to impose price control on Swiss pharma giant Novartis’ anti-cancer drug Glivec for which the MNC holds a controversial exclusive marketing right (EMR) in India. The move by the drug pricing body is being considered at a higher level in the government.

The Maharashtra Food and Drug Administration (FDA) is investigating an issue of misbranding by about eight cosmetic companies. Notices have already been issued to Johnson & Johnson (J&J) and Wipro. The notice to J&J has been issued on the usage of the word ‘baby’ on the labels of its products. The FDA has found that Wipro’s products do not contain sandalwood oil as claimed. 

The Telecom Regulatory Authority of India (Trai) has issued a showcause notice to Hutchison Essar and Bharti Tele-ventures asking why they continued offering local calling services despite the government directive to terminate the services in June 2003. 

The Kerala High Court has ordered rehearing of the case against the Coco-Cola bottling plant in Palakkad which has been shut down for over a year. 

The Madras High court has passed an interim order restraining the LG Household & Healthcare Ltd from importing, manufacturing, marketing and selling its Fast Moving Consumer Goods (FMCG) products with the LG logo in India through any other entity other than its Indian partner, India Household & Healthcare Ltd. 

The central government told Rajya Sabha that it was looking into the issue whether any law has been violated in the allocation of one crore Reliance Infocomm shares to three unlisted firms at the rate of one rupee each. Finance Minister said that Reliance Infocomm and its successor company Reliance Information and Communication Ltd were unlisted companies, which do not fall under the jurisdiction of the Securities and Exchange Board of India (Sebi) and its regulations. The directors and general body of an unlisted company are, under the law as it stands today, free to allocate shares to anyone as long as appropriate resolutions are passed. But the minister said that they are looking into the matter to see if any law has been violated. 

New ventures
Engineers India Ltd (EIL) would be completing the pre-feasibility report of GAIL India’s proposed Rs 7,600 crore gas-fired petrochemical complex i.e., Kerala Gas Cracker Complex coming up in Kochi by next month. GAIL is in talks with the public sector fertilizers and chemicals, Travancore Ltd for acquiring its 400 acre of idle land in the outskirts of Kochi to set up the project. Its investment would be one of the largest ever central government investments in Kerala in past few decades. 

Toronto-based Imax Corporation and Sathyam Cinemas, a leading commercial exhibitor in Chennai announced a pact to install two imax theatre systems at the multiplexes in Chennai. 

Bharat Hotels is considering setting up budget hotels in India, in tie-up with foreign investors. The company also plans to undertake a Rs 1,000 crore expansion in the five-star segment. 

The world’s sixth largest mobile handset manufacturing, Sony Ericsson has asked its vendors Flextronics and Beijing Mobile to consider setting up a manufacturing base in India.

Videocon Industries has proposed a resolution in their annual general meeting for raising Rs 2,000 crore through a global depository receipts (GDRs) issue. The company will use this amount for its petroleum business. The company has decided to enter into exploration of oil and extraction activities. It is in final stages of signing a memorandum of understanding (MoU) for oil production and exploration in the Middle East. It will be signing a MoU with former USSR where there are a lot of oil fields. It will also sign MoUs with global majors for bidding for blocks under the New Exploration Licensing Policy of the government. As such, Rs 2,000 crore will be raised from equity market by GDR while the balance amount will be garnered through debt and internal accruals. 

International ventures
Chennai-based Orchid Chemicals & Pharmaceuticals Ltd has entered into an exclusive agreement with Stada Pharmceuticals Inc, the US subsidiary of Stada Arzneimittel AG of Germany. The agreement is for developing and supplying six prescription generic drugs forx Stada for the US market. 

GAIL (India) Ltd has entered into a memorandum of understanding (MoU) with Bangladesh-based firm Cosmos for joint cooperation in natural gas liquid fractionation, gas processing and LPG projects in the neighbouring country. GAIL will undertake these projects on build-own-operate-transfer (BOOT) basis. Cosmos will offer certain services required for implementation of projects in cost effective and timely manner and provide all support and co-ordination in obtaining all statutory clearances and approvals required for such projects. 

Mahindra & Mahindra (M&M) has announced plans to launch the Scorpio in Oman through Towell Auto Centre following its launch in South Africa, Europe, the UAE, Qatar, Kuwait and Uruguay. Towell is one of the leading national automobile distributors in Oman. 

Mergers & Acquisitions (M & A)
Tata Motors has signed an agreement for acquisition of 21 per cent equity in Hispano Corrocera SA. It has a call option on the remaining 79 per cent to take its shareholding to 100 per cent. With this agreement, Tata Motors will have the license for technology and brand rights from Hispano Carrocera SA. The company’s executive director Ravi Kant has been appointed as chairman of Hispano Corrocera SA. 

CDC Agri-business Management Ltd has acquired 7.13 per cent stake in the Swaraj Mazda Ltd. 

Birla Sun Life Asset Management Company Ltd has informed BSE that the schemes of Birla Mutual Fund have acquired 50,000 shares aggregating 0.42 per cent of the total paid-up capital of Rallis India Ltd on March 14, 2005. The mode of acquisition is through open market and the shareholding of the schemes of Birla Mutual Fund after the acquisition is 6,41,964 shares aggregating to 5.36 per cent of the total paid up capital of Rallis India Ltd. 

As a direct outcome of rescheduling of the Holcim Cement Pvt Ltd’s open offer to shareholders of ACC and Ambuja Cement Eastern Ltd, the offer for Everest India Ltd has been put on hold. 

The UB group has completed the buyout of Kishore Chhabria’s 49 per cent holding in Herbertsons Ltd through block deals at Rs 280.70 per share for a total sum of Rs 131 crore. This is in line with Supreme Court’s verdict of approval. Along with this acquisition, the UB group’s holding in Herbertsons has moved up to 93 per cent. The remaining 7 per cent stake is with the public. 

Sri Adhikari Brothers Television Network Ltd (SABTNL) has entered into an agreement with SET Satellite (Singapore) to sell the SAB TV brand, library programmes to the extent of 1305 hours and related assets for Rs 57 crore. 

The MphasiS BFL group acquired a US-based healthcare benefits management solutions firm, Eldorado Computing Inc, for Rs 72 crore through MphasiS BPO. This signifies MphasisS BPO’s entry into the healthcare insurance and payment BPO market. 

Eveready Industries is planning to tie up with a South Asian firm to make rechargeable batteries meant for digital cameras and portable music systems. 

M & A in pharmaceutical companies
Glenmark pharmaceuticals’ wholly-owned Brazilian subsidiary GFL has acquired hormonal brand Uno-ciclo for $ 4.6 billion. 

GlaxoSmithKline Pharmaceuticals Ltd said that it has decided a share buyback programme of up to 25 per cent of the total paid-up equity share capital and free reserves of the company. 

M & A in telecommunication sector
Mahanagar Telephone-sanchar Nigam Ltd (MTNL) has reiterated its view that a merger with Bharat Sanchar Nigam Ltd (BSNL) is the most feasible option. On the other hand, BSNL officials are tight lipped on what they see as best option. 

In the largest set of block deals in the history of Indian stock markets, international private equity major Warburg Pincus has sold a 6.04 per cent holding in Bharti Tele-Ventures for Rs 2,442 crore. The shares were sold to about 10 foreign institutional investors.

Money Supply
There has occurred a sudden acceleration in the rate of money supply growth during the month end March 4. M3 has grown by Rs. 29,949 crore or by 1.4 per cent taking the total increase during the fiscal year so far to Rs. 231,352 crore or 11.8 per cent, which of course remains considerably lower than in the previous year: Rs. 295,680 crore or 18.0 per cent. The sudden increase in money supply (M3) has essentially occurred in demand deposits – an increase of 4.4 per cent in the month ending March 4 or Rs. 11,871 crore due probably to sizeable float funds associated with increased FII inflows. Foreign exchange assets of the banking system have shot up by Rs. 40,696 crore or by 6.9 per cent during the monthly period cited above. Time deposit growth, on the other hand, has been meagre at only 0.9 per cent during the period or by Rs. 13,987 crore.

Banking Highlights
After long deliberations, the Deposit Insurance and Credit Guarantee Corporation (DICGC) has decided to raise the deposit insurance premium to 10 paise from 5 paise per Rs.100 of assessable deposit per annum. The premium will be raised in a phased manner over 2 year as per the press release of the Reserve Bank of India (RBI). In the first phase, the premium rate would be increased to 8 paise from 5 paise per annum per Rs.100 of assessable deposits for the financial year 2004-05. In the second phase, the deposit insurance premium would be increased to 10 paise from 8 paise, effective from the financial year 2005-06. The total number of member banks (banks insured with the corporation) was 2,595 as of end March 2004. For the same period, the total quantum of insured deposits stood at Rs.8,70,940 crore and total quantum of assessable deposits stood at Rs.13,18,268 crore. The total corpus stood at Rs.8,71 crore by end of the financial year 2003-04. The corpus of the fund had stood at an all-time high of Rs.2,754 crore in 1998-99. However, the following year, over a dozen co-operative banks collapsed in Gujarat and Maharashtra, which resulted in a massive pay-out from the fund. The fund touched a low of Rs.4,34 crore in the financial year 1999-2000. 

The Reserve Bank of India (RBI) has allowed banks authorised to deal in foreign exchange to permit a resident power of attorney holder to remit, through normal banking channels, funds out of the balances in non-resident external (NRE) account to the non-resident Indian (NRI) account holder. The remittances under power of attorney are permitted only to the non-resident account holder. This relaxation in remittance follows the review with reference to the observations/recommendations made by the Committee on Procedures and Performance Audit on Public Services.

Major public sector banks, namely, Central Bank of India, Bank of India (BoI), Union Bank of India, Bank of Baroda and Punjab National Bank (PNB) have embarked on state-wise consolidation of regional rural banks (RRBs) sponsored by them. The consolidation is likely to see the number of RRBs, currently 196 in the country being halved. The consolidation strategy will give RRBs the advantage of size to drive higher volume of business, reduce costs, as fewer controlling offices will be required in each state, and allow for mobility of staff across districts. Central Bank of India has taken a decision to consolidate the number of RRBs under its fold to 10 from the existing 23. BoI has revived a five-year old proposal to consolidate 16 RRBs sponsored by it into six. PNB plans to merge the three RRBs sponsored by it in Haryana into a single entity. It has similar plans for the three RRBs in Punjab. In Uttar Pradesh too, PNB plans to merge three of its six RRBs. PNB is the sponsor of 19 RRBs. These RRBs have a network of 1288 branches. 

The country’s biggest commercial bank, State Bank of India (SBI), has launched a special drive to promote self-employment schemes in rural areas by linking the self-help groups (SHGs) and non-government organizations (NGOs). SBI has assigned specialised priority sector marketing officers for the task on behalf of the bank. These officers would undertake the task in three phrases. In the first phase, they will identify sectors where small industrial units can be set up in a particular region. In the second phase, they will identify the interested persons through local NGOs, whom the bank will provide loans to set up SSIs.

Insurance
SBI Life Insurance has launched Keyman insurance policy to provide cover to key members of a company who are major contributors to growth and profits, and whose absence may affect the business. 

Over 40,000 workers in the seafood processing industries will now come under insurance cover. Recently, the Marine Products Export Development Authority (Mpeda) and the United India Insurance Company signed an agreement to this effect. Under the scheme, the next of kith will be given Rs.50,000 if the person covered dies in an accident. In the event of loss due to natural disasters, the amount payable is Rs.20,000.

In a major restructuring-tariff move that will benefit the shipping industry, the Insurance Regulatory and Development Authority (Irda) has removed the price control on insuring marine hulls from April 1,2005. As per Irda all classes of marine hull insurance stand restructured in respect of new businesses and renewals effective from April 1,2005. As a consequence, these classes of insurance will come within the purview of the “File and Use” regulations, as applicable to non-tariff products of Irda. As per the industry observers the marine hull portfolio is currently around Rs.300 crore business for the domestic insurance industry and with the pricing of the portfolio being restructured, there will be competition among the general insurers to offer cheaper rates for the product. Since for the first time that such a major tariff portfolio has been decontrolled, it would be interesting to see the price war. Until now, the Tariff Advisory Committee (TAC) regulated the tariff. TAC is a constitutional body supervised by Irda, which regulates the pricing of 70 per cent of the products of the general insurance industry. Some of the major portfolios that are so far regulated by TAC are motor, fire, engineering and marine hull business.

Information Technology
Tier-II cities now account for 15 per cent of the total information technology (IT) and information technology enabled services (ITES) exports from India. They generated exports of $2.55 billion of the total exports of $17 billion estimated for the financial year 2004-05. Further, exports from these cities are likely to go up to 30 per cent of India’s total IT and ITES exports by 2007-08. Tier-II cities are emerging as the favorite destinations for the IT and ITES companies as they offer a cost benefit of over 30 per cent compared to prime cities like Mumbai, Bangalore, Chennai, Delhi and Hyderabad. Over the last year or so, tier-II cities like Jaipur, Pune, Indore, Mangalore, Mysore and Kolkata had gained attention but now cities like Mohali-Chandigarh, Triruvananthapurum, Coimbatore and Kochi are the new ones to catch up. Global PC major, Dell, is in the process of setting up its centre in Mohali-Chandigarh. As per Nasscom report the other tier-II cities – Ahmedabad, Aurangabad and Baroda – are also seen making it to the list of destinations for IT and ITES companies in a couple of years.

Telecom
Bharat Sanchar Nigam Ltd. (BSNL), Reliance Infocomm Ltd. and Tata Teleservices have bagged an Rs.8,000 crore mandate for providing rural household direct exchange lines (RDELs) compromising of 8 – 10 million rural household fixed lines under the Universal Service Obligation Fund.

Inflation
After a steady over the past couple of months, the rate of inflation is once again edging up as experienced in the last week. The annual inflation based on wholesale price index rose to 5.3 per cent during the week ended March 5, 2005 from 4.9 per cent registered during the previous week. The annual inflation was at 4.8 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 manufactured items, mainly cement, iron and steel including edible oils. The WPI was marginally up at 188.9 (Base: 1993-94=100) during the week as compared to the previous week. The index of primary articles’ group declined marginally due to a decline in the prices of both, food and non-food articles. The index of fuel, power, light and lubricants group remained unchanged at the previous week’s level of 289. The heavy-weighted (63.7 per cent) manufactured products’ group rose marginally to 168 due to a rise in the price indices of food products, chemicals, non-metallic mineral products and basic metals.

The latest final index of WPI for the week ended January 8, 2005 has again been revised upwards; as a result both, the absolute index and the implied inflation rate moved up to 188.9 and 5.7 per cent instead of the provisional levels of 188.6 and 5.6 per cent, respectively.

Fiscal Policy
Two budget proposals, which have received considerable comments in the media and from the business community, are (i) fringe benefits tax, and (ii) tax on cash withdrawal. It appears from the finance minister’s observations that the government proposes to review the provisions of both the taxes. On the fringe benefits tax, the finance minister has made it clear that it was not the government’s intention to tax those expenditures which constitute legitimates parts of business expenses. There was no question, for instance, of taxing expenses on sales promotion. Likewise, on the cash withdrawal tax, there are reports that the government is proposing to raise the minimum limit of withdrawal from Rs. 10,000 to higher level and to exempt withdrawals from saving deposit accounts.

Financial Market Developments
Capital Markets
Primary Market
UTV Software Communications has been listed on both the stock exchanges on March 17 at Rs 165 and Rs 150 on BSE and NSE, respectively, which is higher than its IPO issue price of Rs 130. Thus, because of the arbitraging possibilities, 52 lakh shares were traded on BSE and 1.03 crore shares on NSE. 

Jet Airways has also been listed on March 14, it opened at Rs 1305 and Rs 1428 on BSE and NSE, respectively, which is at a premium over its issue price of Rs 1100. On its debut on BSE and NSE 68.1 million and 1.28 crore shares, respectively, were traded on them.

Secondary Market
With the sharp spurt in global oil prices, the rising stock indices found it difficult to sustain the momentum and the market turned cautious though positive. The BSE sensex and NSE nifty registered declines of 153.39 points and 44.85 points, respectively, over the previous weeks close. Since the historic high reached by the BSE sensex at 6954.86 on March 9 and closed above the 6900 mark for the first time on March 10 at 6907.65. The index has lost close to 207.31 points from its all-time closing high. 

Due to the approaching year end on March 31, the brokers have asked their clients to square off their positions or pay up the balance amounts and take delivery as a measure of precaution given the prevailing volatility. Usually, this process begins in the last week of March; this year it has begun earlier as the expiry of derivatives contracts falls on the same day and this coincidence could lead to a sharp rise in volatility. 

March 18, the net FII investment in equities has been Rs 8,412.20 crore with purchases at Rs 20,209.40 crore and sales at Rs 11,797.10 crore, with the highest net investment in the said period at Rs 2,897.50 crore on March 15. During the week, they were net sellers only on one session. 

Mutual funds have turned net buyers since the beginning of the new calendar year; earlier since the beginning of the current fiscal year they had been net sellers. Till March 18, their net investment has been Rs 650.81 crore, with purchases at Rs 3,562.64 crore and sales at Rs 2,911.83 crore. 

Despite the sharp increase in IPOs by mutual funds raising huge amounts from the market, there has not been a significant increase in asset under management (AUM) essentially due to the equally large redemptions. It appears that the investors have exited from their existing holdings to purchase the IPOs as they are lured by the on-going IPOs which are issued at par. 

The FIIs’ holdings in the CNX Midcap 200 stocks have increased from 1.57 per cent of the total equities capital of the index companies in March 2003 to 2.84 per cent in March 2004, and further to 3.61 per cent in December 2004. The number of mid-cap and small-cap companies in the FII’s portfolio has increased from 507 in March 2003 to 664 in March 2004 and further to 764 in December 2004. Their share holding has increased from 715 million shares in March 2003 to 2,021 million in December 2004. 

Derivatives 
The BSE and NSE are to revise the F&O marketable lot sizes, as there have been significant price movements in the underlying scrips since the last revision. This has resulted in the value of minimum contracts exceeding in case of some scrips the minimum contract size of Rs 2 lakh and in some cases it is falling below it. 

FIIs have built up huge positions in the F&O segment; their cumulative position as a percentage of the total gross market position in the derivatives segment is at an all time high of 27 per cent as on March 16. The open interest position is also very high for FIIs, which could be due to the low cost of carrying or they could be hedging themselves on long positions in the cash market, which is implied from the fact that they are net sellers in the futures market. 

Government Securities Market
Primary Market 
In the on-tap sale of 7.20 per cent state development loans of Mizoram and Maharashtra for an aggregate amount of Rs 400 crore, the RBI received subscriptions for Rs 433.196 crore which has been retained. 

Secondary Market
As compared with the narrow range of the call rates between 4.73 per cent and 4.76 per cent in the previous week, it ruled between 4.51 per cent and 4.77 per cent in the week ended March 11. Also, the overnight CBLO rates ruled in a wide range between 1.00 per cent and 6.30 per cent this week as compared with 3.54 –4.95 per cent in the week ended March 11.

With the sharp rise in inflation rate, the gilt-edged market turned cautious. The yield on the 10-year benchmark security rose from 6.56 per cent on March 11 to 6.68 per cent on March 18. 

Bonds Market
ICICI Bank’s Rs 700 crore bond issue with an option to retain over subscription of Rs 350 crore is to remain open for subscription between March 26 and March 31. The issue includes: tax saving bond, regular income bond and children growth bond. 

Foreign Exchange Market
The rupee-dollar exchange rate depreciated during the week from Rs 43.58 on March 11 to Rs 43.69 on March 18 due to the continuous RBI intervention in the forex market. 
The six-month forward premia has increased from 1.46 per cent on March 11 to 1.54 per cent on March 18.
The foreign exchange reserves have increased by US $ 2.87 billion pushing the aggregate reserves to $ 140.42 billion for the week ended March 11. 

Commodities futures
It is expected that with the passing of the Forward Contracts (Regulation) Amendment Bill, 2004, the Forwards Market Commission (FMC) will have status equivalent to Sebi. The amendment seeks administrative and financial autonomy, and quasi-judicial powers for FMC. Also, the definition of commodities derivatives and futures contracts is to include index futures, commodity indices, and weather futures. It even provides for option contracts. 

National Commodity & Derivatives Exchange (NCDEX) and Tokyo Grain Exchange (TGE) have signed a MOU for information sharing and market building in areas of their common interest. The two exchanges will assist each other in marketing and educational areas such as joint sessions on new products and services.

Since the NCDEX launched the jeera futures on February 3, the daily volume of jeera has increased from Rs 21 crore to Rs 280 crore on February 24. The average daily spot trading in jeera is estimated to be around Rs 5 crore; thus the futures trading is more than 55 times the daily volume in the spot market. The sharp spurt in volume has been attributed to the fair price discovery mechanism of the NCDEX and also due to the unexpected cold wave and the hailstorm in jeera growing areas. 

The proposal to widen the investor base in commodity markets by allowing foreign players, domestic banks and mutual funds to trade in commodities is considered and a decision is likely to be taken soon. 

FMC is likely to follow the broker registration system of Sebi and is also considering imposing turnover fee on them. However, the FMC may not replicate the system followed by the Sebi. 

Labour
According to the Employees’ Provident Fund Organisation (EPFO), it will be able to sustain the cost of only 8 per cent rate of interest instead of 9.5 per cent approved recently. If the Central Board of Trustees (CBT) opts to maintain a 9.5 per cent interest rate for 2005-06, it will be left with a deficit of around Rs. 1,200 crore in addition to the Rs. 927 crore shortfall it faces during the current financial year. The CBT, headed by Labour Minister K Chandrashekhar Rao, is likely to put pressure on the government for covering the over-Rs. 900 crore gap caused by 9.5 per cent interest rate for three years starting 2002-03. However, the Finance Ministry has already ruled out any possibility to support EPFO to help it meet the increased 9.5 per cent interest liability. The CBT had approved a Golden Jubilee Bonus of an additional rate of 0.5 per cent in the year 2003-04, in addition to normal rate of 9 per cent. 

EXTERNAL SECTOR
Policy issues
The government has introduced the patents bill in the Lok Sabha. The bill is seeking to replace an ordinance so as to meet WTO obligations of allowing product patents in pharmaceuticals, agri-products and embedded software. The bill has been introduced by a voice vote. If a consensus is not arrived, it would result in violation of the country’s obligations under the Trade Related Intellectual Property Rights (Trips) agreement which requires India to introduce a product patent regime by January 1, 2005. 

The duty entitlement pass book (DEPB), which will lapse in the month-end, is likely to be extended for at least six months. The new scheme to replace the DEPB scheme will not be introduced in the National Foreign Trade Policy on March 31 since the government is still working on the scheme.

The commerce minister announced that the proposed export-import policy 2005 would take all the necessary steps in order to achieve India’s exports of $ 150 billion-$ 300 billion by 2009-10.

The chief of International Monetary Fund (IMF), Mr Rodrigo de Rato fully backed the Reserve Bank’s stand on not using forex reserves for funding infrastructure projects. The country has forex reserves of $ 137.55 billion. The RBI is averse to the idea of them being used for financing infrastructure projects.

Exporters have conveyed to the centre to create hassle free export-import related transactions by e-commerce and reduce hefty transaction costs. Exporters, who had gathered under the ageis of Federation of Indian Export Organisations (FIEO) at the open session with commerce secretary SN Menon, also demanded that the centre should reconsider the recent budget proposal to impose service tax on exporters.

Export-related issues
Indian and Pakistani exporters exporting to the 25-nation European Union (EU) market are to be treated alike from April 1. This is the date on which the EU is expected to introduce its revised generalized system of preferences (GSP) scheme, under which the exports of developing countries enter the EU market either as duty free or at reduced rates of duty. The revised scheme offers a new deal for vulnerable developing countries, whose economies are poorly diversified. Known as GSP-Plus, it provides for duty free entry to the EU market for some 7,200 products. Neither India nor Pakistan reportedly appears on the list of developing countries entitled to GSP-Plus, which the EU foreign ministers are expected to adopt. 

Tier-II cities now account for 15 per cent of total IT and ITES exports from India. They generated exports of $ 2.55 billion of the total exports of $ 17 billion estimated for fiscal 2004-05. These cities offer a cost benefit of over 30 per cent compared to prime cities like Mumbai, Chennai, Bangalore, Delhi and Hyderabad. Recently, tier-II cities like Jaipur, Pune, Indore, Mangalore, Mysore, Kolkata have gained attention but now cities like Mohali-Chandigarh, Tiruvanathapuram, Coimbatore and Kochi are the new ones to benefit. 

International Issues
The US 
The US current-account deficit increased to a record $ 665.9 billion in 2004. The deficit which includes financial transfers, widened to a $ 187.9 billion in the quarter ended December 2004 from $ 165.9 billion in the previous quarter. 

The US trade gap widened to a near-record $ 58.3 billion in January 2005. Imports increased by 1.9 per cent to record $ 159.1 billion. Also, exports increased by 0.4 per cent to a record $ 100.8 billion. 

Japan
A revised government report has stated that Japan, the world’s second largest economy has unexpectedly pulled out of recession last quarter as manufacturers accumulated stockpiles in anticipation of growing demand. GDP increased at an annual rate of 0.5 per cent as compared with previous estimate of 0.5 per cent decline. 

Euro area
The euro area economy grew 0.2 per cent in the quarter ended December 2004 as the economies of Germany and Italy underwent contraction during the period. 

Germany
The German economy is experiencing highest unemployment since World War II. This has resulted in contraction in the fourth quarter of 2004-05 of this $ 2.7 trillion economy.

China
The report published by the China Centre for National Accounting and Economic Growth has stated that China’s GDP is expected to grow at 8 to 9 per cent in 2005. The factors supporting this forecast are listed as stronger market forces, the improvement of economic system and the benefits brought by China’s entry into the World Trade Organisation (WTO). 

According to the Chinese premier Wen Jiabao, China is working on adopting a more flexible exchange rate system and may introduce changes unexpectedly. The US, Japan and Europe have exerted pressure on China to loosen the yuan’s peg of about 8.3 to the dollar, which they say gives Chinese exporters an unfair advantage by holding down the currency’s value. 

China’s industrial production increased by 17 per cent in the first two months of 2005. There was a 14 per cent increase in December 2004. China’s economy is world’s seventh largest economy. 

Israel
Israel’s trade deficit widened in February 2005 to a seasonally adjusted $ 469 million from $ 464.4 million in the corresponding month of the previous year as the US dollar strengthened against the euro and other world currencies. Imports, excluding diamonds, ships and aircraft, grew 2.5 per cent to about $ 3.36 billion. Exports increased by 2.7 per cent to about $ 2.89 billion. 

Credit Ratings
Crisil has assigned a provisional rating of AAA (so)/stable to Konkan Railway Corporation’s Rs. 75 crore taxable bond programme. It has also reaffirmed the AAA (so)/stable rating to the Corporation’s Rs. 2,607 crore billion existing taxable and tax-free bond issues. 

Icra has assigned an A1+ rating to Karnataka Bank’s (KBL) Rs. 300 crore certificate of deposits (CDs) programme; the credit rating agency has taken into account KBL’s improved profits driven by its efforts to reduce the costs of its deposits, control on operating expenses, moderate levels of fresh NPA generation and strong capital adequacy ratio (CAR).

In an another exercise, Icra has reaffirmed the A1+ rating to Graphite India’s (GIL) Rs. 30 crore CP programme. Simultaneously, it has also reaffirmed the LAA- and MAA ratings assigned to the GIL’s Rs. 50 crore long-term NCD and FD programme, respectively. The ratings reflect GIL’s dominant position in the domestic graphite electrode industry, its success in the export markets and the ongoing upturn in the industry leading to healthy profitability, strong cash accruals and improving capital structure. 

Care has upgraded the rating assigned to Emami’s (EL) proposed long-term debt (including NCD issue for an amount of Rs. 20 crore) from AA to AA+. The debt is proposed to be repaid in four equal semi-annual installments after a moratorium of four years from the date of allotment. 

In an another exercise, Care has assigned AAA rating to ICICI Bank’s proposed Rs. 450 crore tier-II bond issues. The rating factors in the bank’s strong market position, its resource raising ability, proactive management and the measures taken by it to diversify and reduce its credit portfolio risks. 

Fitch has assigned AA (ind) and F1+ (ind) ratings to the Rs. 3,000 crore long-term debt programme and Rs. 1,500 crore short-term debt programme, respectively, of the Housing and Urban Development Corporation Ltd. (HUDCO).

Theme of the week:

Indian Telecom Industry

Telecom services the world over has emerged as a pivotal tool for economic development, for they have began to influence every walk of life. In India, development of telecom infrastructure has been conceived as the backbone of industrialisation as well as the general socio-economic development. Accordingly, the Department of Telecom (DoT) has been formulating developmental policies for an accelerated growth of telecommunication services. 
Demand and Supply

As indicated in Table 1 the number of direct exchange lines (DELs) in operation (i.e., main lines in operation) has been taken as supply whereas demand has been computed by adding the number of subscribers in the waiting list to the number of DELs in operation. However, it needs to be kept in mind that the number in the waiting list, in certain cases, is unlikely to reflect the potential demand for telecom services in the economy. The market potential may be much more than what is reported through waiting list because the number in the waiting list reveals the demand registered in those areas where telecommunication facilities are available; the list represents the demand to be fulfilled. However, in areas where telecom infrastructure is not adequate, the demand may not get registered at all, it may rather remain suppressed. 

Liberalisation
In 1991 India adopted the new economic policy (NEP) of liberalisation aiming at improving the economy’s competitiveness in the global market and attaining rapid growth of exports. Another element of the NEP was to attract foreign direct investment (FDI) and stimulate domestic investment. A telecommunications service of world-class quality was essential for the success of the NEP. It was, therefore, necessary to give the highest priority to the development of telecom services in the country. Learning from the experience of developed countries, India like many other countries of the world adopted a gradual approach to telecom sector reform through selective privatization and managed competition in different segments of the telecom market. To begin with, India introduced private competition in value-added services in 1992. 

Deregulation
The primary reason for deregulation was the poor performance of state-owned telecom companies – huge unmet demand, poor quality of service, high prices and inefficient operations. In 1994 the telephone density in India was about 0.8 per hundred persons as against the world average of 10 per hundred persons. It was also lower than that of many developing countries of Asia like China 1.7, Pakistan 2 and Malaysia 13. As on March 1994, there were about 8 million lines with a waiting list of about 2.5 million. Only 1.4 lakh villages, out of a total of 5,76,490 villages in the country, were covered by telephone services. India moved towards privatization of telecom sector by adopting the Telecom Policy of 1994.

National Telecom Policy (NTP) 1994
The initial framework for the deregulation of India’s telecom sector was contained in the NTP 1994. The new policy opened up basic telecom services to competition. Foreign equity participation up to 49 per cent was permitted in case of a joint venture company formed between an Indian company and foreign company for providing basic telecom services. This policy promised the highest priority to the development of telecommunications, and had wide-ranging objectives like: 

a) “Telecommunication for all and telecommunication within the reach of all”; this means ensuring the availability of telephone on demand and as early as possible. 
b) Achieving universal service covering all villages as early as possible.
c) The quality of telecom services should be of world standard; the objective was to provide the widest permissible range of services to meet the customers' demand at reasonable prices.
d) Taking into account India's size and development, it was necessary to ensure that India emerges as a major manufacturing base as well as a major exporter of telecom equipments.
e) The defense and security interests of the country to be protected. 

NTP 1994 also recognized that the required resources for achieving these targets would not be available only out of Government sources and concluded that private investment and involvement of the private sector was required to bridge the resource gap. The Government invited private sector participation in a phased manner from the early nineties, initially for value added services such as Paging Services and Cellular Mobile Telephone Services (CMTS) and thereafter for Fixed Telephone Services (FTS). Although the terms of basic licences were to be largely the same as the licences for other services, basic operators were required to supplement DoT’s efforts in providing telecommunication connections in rural areas. 

Subsequently, with the introduction of the NTP 1994, certain guidelines for awarding licences for basic (fixed-line) and more cellular services were issued. An invitation was made for tenders from prospective operators to provide these services in each telecom circle. However, before the licences could be awarded, law suits challenging the validity of the process were filed. 

Development Prior to TRAI
Growth and development in the telecom sector in the country was being implemented according to the provisions implicit in the NTP 1994. After a competitive bidding process, licences were awarded to 8 CMTS operators in four metros, 14 CMTS operators in 18 state circles, 6 FTS operators in 6 state circles and to paging operators in 27 cities and 18 state circles. VSAT services were liberalised for providing data services to closed user groups. The Government has also announced opening up of Global Mobile Personal Communications by Satellite (GMPCS) and had issued one provisional licence. By the end of March 1997 around 2.67 lakh villages were covered by telephone services compared to 1.14 lakh in 1994. In India, competition in cellular telephony was allowed in a duopoly mode. This was gradually increased to licensing of four operators in each of the four metros and thirteen circles. Cellular mobile telephone subscribers in India increased from 77 thousand in 1995 to 0.88 million in March 1998. At the end of March 1998, the number of fixed-line subscribers surged to 17.80 million compared to 9.80 in March 1995. Thus, the gross subscriber base consisting of fixed and mobile, for the same period has almost doubled to 18.7 million from 9.9 million. As a result, the telecom sector had attained an overall tele-density of around 1.94 per cent in March 1998 as compared to 0.89 per cent in the pre-reform period.

Outcome of NTP 1994
Certain important objectives of the NTP 1994 have remained unfulfilled, like availability of telephone on demand, provision of world class services at reasonable prices, transforming India as a major manufacturing/export base for telecom equipment and universal availability of basic telecom services to all villages. It also announced a series of specific targets to be achieved by 1997. As against the NTP 1994 target of provision of 1 PCO per 500 urban population and coverage of all 6 lakh villages, DoT has achieved an urban PCO penetration of 1 PCO per 522 and has been able to provide telephone coverage to only 3.1 lakh villages. In addition the Government recognised that the result of the privatisation has so far not been entirely satisfactory. While there has been a rapid rollout of cellular mobile networks in the metros and states with over 1 million subscribers, most of the projects were facing problems. 
Since 1995, thirty-four CMTS and six FTS licences were issued. The terms and conditions of these licences were onerous, and required large fees to be paid by operators. These costs were to be borne by the operators without any correlation to the revenue generated, these exorbitant fees proved tremendously burdensome since operators also had to bear the cost of installing completely new networks. To make matters worse, demand for services, especially in non-urban areas, was not as much as had been forecast. India was yet to experience mobile explosion of the scale other countries have seen. Soon, many operators were in financial difficulties and found it impossible to make licence payments because of poor cash flows, some of which amounted to only one-third of what had been originally projected. Faced with near bankruptcy, telecom operators requested a two-year moratorium on licence payments as well an extension of the term of the licence. The situation worsened when DoT issued demand letters to operators and terminated the licences of some operators for non-payment of licence fees. 

As a result, the private sector entry has been sloer than what was envisaged in the NTP 1994. This situation was a tremendous set-back to the policy of liberalization of telecommunications. Therefore, the government decided to step in to prevent a total collapse of telecom reforms. 

Telecom Regulatory Authority of India (TRAI)
In 1997, Parliament enacted the TRAI Act to “regulate telecommunications services.” This law established a regulatory entity called the Telecom Regulatory Authority of India (“TRAI”). As originally constituted, TRAI was responsible for making recommendations to the Central Government on telecommunications, “supervising” service providers, and, more importantly, settling disputes between service providers and consumers and among service providers. TRAI began functioning as a regulatory authority in the telecom sector from 20th February 1997. It has been set up with a view to discharge regulatory functions, thereby providing a level playing field in the telecom sector. The functions assigned to the Authority were:

a) Recommend the need and timing of introduction of a new service provider.
b) Recommend the terms and conditions of licence to a service provier.
c) Protect the interests of customers of telecommunication services. 
d) Fix rates for providing telecommunications services within and outside India. 
e) Monitor the quality of service providers.
f) Settle disputes between service providers. 

Need for a new telecom policy 
The government recognises that provision of world-class telecommunications infrastructure and information is the key to rapid economic and social development of the country. It is critical not only for the development of the Information Technology (IT) industry, but also has widespread ramifications on the entire economy of the country. It was also anticipated that going forward, a major part of the GDP of the country would be contributed by this sector. Accordingly, it is of vital importance to the country that there be a comprehensive and forward looking telecommunications policy which creates an enabling framework for development of this industry. The new telecom policy framework is also required to facilitate India’s vision of becoming an IT superpower and develop a world-class telecom infrastructure in the country.

National Telecom Policy (NTP) 1999
The NTP 1999 is designed to introduce fresh interest in Indian telecommunications, an industry affected by the controversy over licence fees and by uncertainty from the frequent clashes between the TRAI and the government over telecom policy. This policy is also intended to attract further foreign investment and to promote growth in telecommunications. But it strengthens the regulatory framework in certain matters such as awarding licences. Some important features of the NTP 1999 include:

a) Permitting “migration” by basic and cellular operators from a fixed licence fee system to a revenue sharing formula to be determined by TRAI;
b) Extending terms of cellular and basic licences to twenty years;
c) Allowing existing basic and cellular operators to provide long-distance services within their respective service areas without an additional charge;
d) The introduction of domestic long-distance services beyond existing service areas; 
e) Enabling better interconnectivity arrangements;
f) Requiring TRAI’s recommendations prior to issuance of new telecom licences;
g) Establishing uniform telecom standards;
h) Overhauling the Telegraph Act.

Sustained Growth
With unified licensing, the Government has ended the licence raj in telecom, resolved all litigations, created a level playing field for all operators and paved the way for faster and sustainable growth of the telecom industry. After the announcement of NTP 1999, progress in telecom in India has been extremely rapid. The total number of telephones (basic and mobile) rose from 22.8 million in 1999 to 88.6 million at the end of October 2004. Teledensity, which was languishing at around 2 per cent in 1999, has shown an impressive jump to around 9 per cent in February 2005.

As per industry data, the Indian cellular sector has registered a compound annual growth rate (CAGR) of 109 percent in cellular subscribers during the period 1995-2001. In fact, the growth rate for the financial year 2001-02 stood at 79 percent. 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 around 2.86 per cent in March 2000.

Cellular Industry
Wireless has been the principal engine for telecom growth in the country, as in other parts of the world. The growth trends in Indian telecom mirror those in the global industry. The cellular industry, with an investment of Rs.25,000 crore, is the most competitive within the telecom sector. In October 2004, the number of mobile phone users in India has crossed the number of fixed-line subscribers for the first time. According to the Cellular Operations Association of India, the total number of mobile subscribers at the end of October 2004 was 44.52 million compared with 43.96 million fixed-line subscribers. The number of mobile users in the country has exceeded the fixed subscribers in circles like Mumbai, Delhi, Chandigarh, Punjab and Chennai. The cellular industry in India has clearly shown that the benefits of the NTP 1999 and migration package have been transparently passed on to consumers. The key factors responsible for the success of mobile telephones in India are:

a) Competition-induced sharp decline in tariffs and handset prices, which have made wireless highly affordable.
b) Aggressive promotion of prepaid offerings 
c) The industry has welcomed the increased competition from the third and fourth cellular operators.

Indian cellular mobile tariffs lowest in the world

From 1955 to the first half of 1999, India's cellular tariffs were hovering around US$0.40 per minute. But in August 1999, the Indian government moved to a revenue sharing scheme that helped drive prices downwards. During the period 2000-2003, mobile tariffs continued to show a downward trend and declined by around 50 per cent. Then, there were two cellular operators in each of the 21 telecom circles and in some circles it had doubled to four. There was an on-going competition in tariff rates in metros; for instance currently in Mumbai there are 6 cellular operators offering competitive rates to customers. 

As per the review of tariff statistics available from the International Telecom Union (ITU), EMC, the mobile telephony tariffs in India are the lowest in the world. As per the cellular mobile tariff statistics from EMC, India has the lowest monthly cost of a 300-minute basket for US $16 per month for cellular services. In contrast, a 300-minute basket costs $21 in China, $29 in Thailand, $40 in Malaysia and $42 in Indonesia. The tariffs in South American countries are far higher in the range of $60 - $100. It may be noted that the Indian operators are offering these low tariffs, despite prohibitive regulatory costs that are amongst the highest in the world. Indian cellular operators are passing 30-35 percent of their revenues to the government by way of various levies - licence fees (8-10 percent), spectrum usage charges (2-4 percent), service tax (10 percent) and in addition they have to pay access deficit charges (ADC).

Public versus Private participation
The structure and composition of telecom growth has undergone a substantial change in terms of mobile versus fixed phones and public versus private participation. In 1999, both mobile phones and private sector separately accounted for 5 per cent of total number of phones. In October 2004, mobile phones accounted for more than 50 per cent of total phones and the private sector accounted for 44 per cent of total phones. In case of mobile phones private sector accounts for around 80 per cent of the market share (Table 3).

FDI in telecom sector
Indian telecom sector witnessed inflow of foreign direct investment (FDI) worth Rs.9,872.5 crore till January 2004 from August 1991 with the highest contribution coming from Mauritius at 72.3 per cent. The highest amount of FDI of Rs.3,970.9 crore came in the year 2001. In, 2002, the FDI inflow was Rs.1,081.5 crore and it slowed down in 2003 to Rs.301.40 crore. However, during the period August 1991 to August 2004 the amount of FDI approved was Rs.41,368 crore as of August 2004. 

Recently, the government has allowed 74 per cent FDI in telecom companies, raising the ceiling from 49 per cent at present. However, the higher cap comes with a slew of riders to address security concerns raised by some political parties and the intelligence agencies. The 74 per cent cap will include the shares held by foreign institutional investors, non-resident Indians, depository receipts (ADRs and GDRs), foreign currency convertible bonds and convertible preference shares. In addition, the foreign investment in holding companies will also be taken into account while calculating the foreign investment in holding limit. Companies will be required to disclose the holding pattern half-yearly and also certify that its foreign investment is within the 74 per cent cap. 

Rural Telephony
As on November 30, 2004 more than 5,20,000 villages were connected using a Village Public Telephone. The remaining 66,822 villages, excluding around 22,000 villages with population less than 100, will be covered in a phased manner in the next 3 years. More than 2 lakh Public Call Offices (PCOs) are also providing community access in the rural areas. Recently, Bharat Sanchar Nigam Ltd. (BSNL), Reliance Infocomm Ltd. and Tata Teleservices have bagged an Rs.8,000 crore mandate for providing rural household direct exchange lines (RDELs) compromising of 8 – 10 million rural household fixed lines under the Universal Service Obligation Fund.

Challenge
Despite the rise in tele-density to around 9 per cent in 2005 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. In order to increase the tele-density, the Economic Survey 2004-05 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 in tele-density compared to neighboring countries like Pakistan, Bangladesh and Nepal but behind Sri Lanka. 

Indian telecom industry is heavily dependent on equipment imports from companies in Europe, US and Canada. Although India has all the expertise and resources required for manufacturing, the country is sourcing almost all the communication equipments from cell phones to network equipments from abroad. There is need to set up telecom park in India. Telecom parks are common in developing countries such as China, though the concept would be new in India. Elcoteq, a $2.8 billion Finland-based corporation, intends to rope in global equipment suppliers and local OEM’s (original equipment manufacturers) to form the park, which is envisaged as ‘supply cluster’ to meet all hardware, software and design requirements of the telecom industry in India. The company is currently trying to get global vendors of handsets, network equipment and telecom software to be part of the park. Nokia, Ericsson and Motorola are working on setting up a telecom park in Karnataka – the first of its kind in the country. The park is expected to be ready in a time frame of less than 2 years. This will also be able to bring more FDI in the telecom sector through this project.

 

*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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