Current Economic Statistics and Review For the Week 
Ended March 26, 2005 (13^th Weekly Report of 2005)

  I

Highlights of  Current Economic Scene

INDUSTRIAL PRODUCTION

The general index for industrial production (IIP) with base 1993-94 for the month of January has registered a growth rate of 8 per cent. The cumulative growth rate (April-January 2005) has been recorded at 8.4 per cent against a lower rate of 6.7 per cent during the same period of the previous year. Manufacturing sector continued to post healthy growth rate of 9.2 per cent as compared to a robust growth rate of 7.3 per cent in the same period last year. Mining sector has posted a growth rate of 4.6 per cent, which was marginally lower than 4.7 per cent recorded during the first ten months of the previous fiscal year. Electricity generation has also posted a commendable growth rate of 6 per cent, much higher than the 3.7 per cent recorded in the corresponding period of the previous year. 

Under the use-based classification, capital goods sector has posted yet another month of commendable performance with rate of growth at 12.9 per cent for the first ten months of the current fiscal year. This comes after a growth of 10.7 per cent during April-January 2004. Basic goods sector has registered a growth rate of 5.9 per cent during the period under review. The growth rate for the intermediate goods industry stood at 6.3 per cent in the first ten months of 2004-05. However, this sector has posted an anaemic growth rate at 1.8 per cent in January 2005, as against a healthy growth rate of 6.9 per cent in the same month of the previous year. The consumer durables sector registered a double-digit growth rate at 15.3 per cent, as did the consumer non-durables sector at 10.6 per cent during April-January 2005. 

The industries under the two-digit classification have displayed a mixed performance with two industries registering negative growth rates, on the one hand, and four industries posting double digit growth rates. While six industries have posted growth rates between 0 per cent and 4 per cent, the remaining five industries have registered growth rates between 4 per cent and 10 per cent.

CORPORATE SECTOR

New ventures
Automobiles
Toyota Kirloskar Motor Pvt Ltd prefers to improve its supplier base in India as compared to importing from Thailand by making use of Indo-Thai Free Trade Agreement (FTA). The managing director said that even for the small car which the company is planning to introduce in India, the localization content would be even 100 per cent.

French car maker Renault is looking at sourcing components for the Renault-Nissan alliance as a whole. Renault has also decided to set up an R&D technical center in India to tap the country’s intellectual capital. Besides its tie-up with Mahindra & Mahidnra, it will not only manufacture the Logan but will also be leveraged to source components for its cars globally. 

Software
US-based $ 49 billion PC maker Dell Inc has unveiled plans to significantly expand its operations in the country, with the launch of its third contact center in Mohali, near Chandigarh. While it is looking at recruiting 1,500 professionals by end-March 2006 for this center the management has ruled out setting up of a manufacturing facility in India.

Cisco systems, which provides IT network devices, has embarked upon an initiative to attract business from the small and medium business segment. It has extended its reach to smaller companies through a new initiative called Opportunity Incentive Program (OIP). The initiative could pose tough competition to domestic players like D-Link which has a significant presence in the segment.

Intelenet, the joint venture between housing finance major Housing Development Finance Corporation (HDFC) and Barclays Bank plc of the UK, plans to extend its services to the IT and consulting areas in collaboration with a US firm.

Petroleum
Oil & Natural Gas Corporation (ONGC), the nations’s largest oil producer, said it may invest in a Rs 4,000 crore refinery to process crude oil produced in Rajasthan. The refinery would have the capacity to process as much as 5 million tonne of crude oil a year from fields in the northwest Indian state operated by Cairn Energy Plc, a UK oil exporter. 

ONGC has begun drilling in a shallow water block in Sunderbans. The company plans to spend Rs 600 crore in exploring the block which it obtained in the third round bidding under the new exploration and licensing policy.

Kuwait Petroleum corporation (KPC), Saudi Aramco and National Iranian Oil Company (NIOC) are negotiating with several Indian oil companies, including Hindustan Petroleum Corporation Ltd (HPCL) and Essar Oil, to set up joint venture grass root refineries in the country.

LG Electronics has decided to close down its microwave oven plant in England and shift complete manufacturing to its Ranjangaon plant near Pune. This is a plant with a capacity to manufacture three lakh units. The company plans to make about 1.2 lakh microwave ovens this year. 

Others
Everready Industries India has decided to set up a Greenfield plant in Uttaranchal with an investment of Rs 75 crore. The plant would have a capacity of 400 million batteries and two double A lines would be installed in phases and completed over 18 months. 

The US-based Hines and the Singapore-based Temasek are looking at investing in the real estate sector with the government now permitting foreign direct investment in the sector. A host of a mid and medium-sized companies in Singapore, Malaysia and the Middle East are also planning to invest in the real estate market. 

General Electric plans to manufacture a whole range of low cost, no frills medical systems for the Indian and Chinese markets. 

UTStarcom, the US-based telecom network infrastructure supplier, is set to enter the domestic mobile handset market. While the company would initially make its foray with code division multiple access handsets, it is also keeping its options open with regard to global system for mobile handsets. 

International ventures
Oil India has acquired its first overseas oil field in Libya outbidding global giants like Occidental, CNPC and Petrocanda. Indian Oil Corporation (IOC).

Concerns raised by a paper manufacturing plant at Richards Bay in South Africa has made Tata Iron & Steel Co (Tisco) shift its 1.2 million tonne per annum ferrochrome smelter to an alternate site. This development has resulted in the company shifting its commissioning schedule for the yet-to-be-built plant at Richards Bay by around nine months. The project is estimated to cost Tisco Rs 250-300 crore.

 
Policy issues
Public sector undertakings (PSUs) may be given additional powers in all areas except some areas specified in a ‘negative’ list where the government will continue to enjoy decision making powers. The ad hoc group on PSUs headed by Dr Arjun Sengupta is likely to recommend enhancing powers of profit making PSUs in a number of areas. 

The ministry of heavy industries plans to spend Rs 1,700 crore on the National automotive testing and R&D infrastructure project (Natrip) to develop automotive testing and homologation facilities of world class standard in the west, north and southern regions of the country.

Company issues
Legislative matters

Stock exchanges have asked Reliance group to clarify reports about settlement between the Ambani siblings.

A Calcutta high court judge ordered status quo with respect to the controlling interest of the shares held by the late Priyamvada Birla until further orders. 

The battle between Bajaj Auto Limited and the Firodia promoted Bajaj Tempo Limited over the latter’s change of name to Force Motors has heated up with the issue now moving to the Bombay High Court.

Madras Fertilizers Ltd (MFL) has received a temporary relief, with the Union ministry of fertilizers and chemicals releasing the outstanding subsidy arrears and escalation charges due till January 2005 to the public sector firm. With this funds, MFL can now tide over the acute liquidity crunch facing the company. 

US-based Pfizer has emerged as the biggest pharma patent applicant in India as the Kolkata-based patents office opened the mailbox of patent pleas for pharma and agrochem inventions for 1995-2005. Mailbox applications are meant to recognize inventions as India switches to a product patent regime. Johnson & Johnson with 262 submissions emerged as the second largest applicant. Among Indian companies, Dr Reddy’s Labs with 205 mailbox submissions has been the most aggressive patent seeker. Rival Ranbaxy Laboratories has been a less aggressive user of the mailbox with just 38 filings. Of a total of 8,926 patent pleas in the mailbox, a majority of 7,520 belong to foreign entities, while the balance 1,406 are Indian applications. 

GAIL has informed that effective from April 1, it will cut gas supplies by 55 per cent for its private sector buyers and 30 per cent for PSU buyers. The cuts amounts to 6.75 mmscmd of reduced supplies. It isn’t clear yet who will make up for the shortfall. From April 1, the government has allowed direct marketing of gas from the Panna-Mukta-Tapti (PMT) fields, owned jointly by British Gas, Reliance and ONGC. At present, GAIL’s pipeline network is transporting the entire volume of PMT gas. 

The debt recovery tribunal has issued a fresh notice regarding the bankrupt Daewoo Motors India Ltd, placing the company’s assets in the open market with the intention of selling the facility in the Surjapur Industrial Area on a piecemeal basis. 

Shaw Wallace Breweries Ltd has threatened to pull the curtains on its only brewery unit in Orissa complaining about the skewed excise policy of the state government. 

The Telecom Regulatory Authority of India (Trai) directed Videsh Sanchar Nigam Ltd (VSNL) to stop the sale of its range of Tata Indicom outbound prepaid calling cards. 

Other issues
Hindustan Lever is thinking of changing its 49 year old name and logo to Unilever India, in line with Unilever’s new brand identity. In rural markets, a brand name with ‘Hindustan’ plays a vital role in luring consumers. In all probability, the FMCG major may retain ‘Hindustan’ in its brand name and settle for an adapted name – ‘Hindustan Unilever Ltd’.

General Electric Co and Bechtel Group, the foreign stakeholders in the Indian power plant formerly owned by Enron Corp, may reach an out-of-court settlement by May with local lenders. The two companies are demanding $ 380 million from Indian lenders, which are restructuring the project. 

BPO companies have found new ways to control attrition rates. One method being used is to allow employees to work out of home. This has significantly helped in increasing the employee comfort levels and simultaneously controlling attrition.

Multinational companies flush with funds from the sale of land and better cash flow are proposing special dividends or a step up of their regular dividends. During 2004, as many as five multinational pharmaceuticals, chemicals and fast moving consumer goods companies proposed special dividends. Five other multinationals proposed to step up their yearly dividends.

3iInfotech (formerly ICICI Infotech Ltd), an information technology solutions and services company, plans to use the proceeds from its initial public offer (IPO) of Rs 230 crore to repay loans as well as redeem the preference share capital. 

Rise in prices
Tata Steel is about to raise its long term contract prices for steel by Rs 5,000 per tonne effective April 1, 2005. Prices at Tata Steel have been in the range of Rs 23,000 per tonne to Rs 30,000 per tonne for various grade of steel products. The company had earlier voluntarily announced a price cut of Rs 2,000 per tonne on August 22, 2004. The increase in prices have resulted from an increase in raw material prices of coal and iron ore.

LG Electronics will be increasing the prices of colour televisions, refrigerators and washing machines by 5-10 per cent on the back of an equivalent rise in input cost. The company had previously revised prices of its products in November 2004.

Prospects
A survey conducted by Grant Thornton on international business owners claims that over 87 per cent of the Indian companies are upbeat about their turnovers as against the global average of 63 per cent. The survey covered 6,300 companies across the globe and around 500 Indian outfits participated in it. 

Mergers & Acquisitions
The Cabinet Committee on External Affairs (CCEA) gave its approval to Holdcem Cements Pvt Ltd and Holderind Investments, subsidiaries of Holcim in India, to acquire up to 100 per cent of the total paid up share of Ambuja Cement India Ltd (ACIL). The CCEA has amended the existing foreign capital approval to Holcim from $ 800 million to $ 1.2 billion i.e., Rs 4,885 crore. 

Vedanta resources has promoted Anil Agarwal to become chairman from chief executive position to help guide the company’s expansion. 

Taking forward its strategic alliance with MCHEM Pharma (Group) Ltd of China, Matrix Laboratories Ltd has signed a revised memorandum of understanding to acquire a majority stake (60 per cent) in the Chinese company and its other associate group companies. 

Tata Chemicals Ltd acquired a 33 per cent stake in Morocco based chemical company, Indo Maroc Phosphore S.A for a consideration of Rs 133 crore. 

Satyam Computer Services Ltd has entered into a strategic global alliance with Zycus Inc, a leading provider of spend data management software. 

Hyderabad-based Infotech enterprises Ltd has acquired Noida-based Tele Atlas India Pvt Ltd, a wholly owned subsidiary of Tele Atlas BV of the Netherlands. Infotech has acquired Tele Atlas, a provider of digital maps, geospatial products and dynamic location content, in an all-cash deal worth Rs 8.29 crore. 

The government of Singapore sold a 3.4 per cent stake in TVS Motor. Morgan Stanley International bought the shares.

Chhabria family-owned Jumbo World Holdings Ltd has agreed to sell 54.54 per cent of Shaw Wallace and Co (SWC) shares to Vijay Mallya’s McDowell & Co Ltd and a few of SWC’s affiliates for $ 300 million or Rs 1,300 crore.

BANKING HIGHLIGHTS

Small Industries Development Bank of India (SIDBI) plans to raise Rs.1,500 crore in the current fiscal through the issue of capital gain bonds and some other issues. The bank is also working on a scheme so that it can partner with other commercial banks to lend working capital to small and medium enterprises (SMEs). Sidbi does not come under the ambit of the Banking Regulation Act and consequently does not fall under the Negotiable Instruments Act. As a result it is unable to extend working capital loans. The bank is in the process of finalising the legal documents for the envisaged scheme, which will be abide with the SIDBI Act guidelines. This is aimed at mitigating the view of banks that SME loans result into high amount of non-performing assets. Sidbi has received commitment worth Rs.475 crore for the Rs.500 crore for SME Venture Capital Fund, announced in the Union Budget 2005-06. Sidbi has identified auto clusters in Ludhiana, Pune and Chennai for providing credit. 

Bank of India has launched an International Gold Credit Card to meet the needs of the overseas traveller. The annual fee of the card is Rs.1,500 with an interest rate of 1.70 per cent.

ICICI Bank has allotted 43,770 eauity shares of face value of Rs.10 each on March 21, 2005 under the Employees Stock Option Scheme, 2000 (ESOS). 

Centurion Bank has raised $70 million (around Rs.300 crore) through global depository receipts (GDR) issue. The issue will be listed on the Luxembourg Stock Exchange.

The Reserve Bank of India (RBI) has asked the Kalidasa Co-operative Bank in Bangalore to stop all transactions and said that customers can withdraw only Rs.1,000 till the bank’s NPAs declines. 

The Indian Banks Association (IBA) is demanding for a separate legislation for securitisation so that financial assets held not only by banks but also by any person or a non-banking entity can be securitised. A separate law having wider application is being sought, as under the securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act 2002; only banks and financial institutions (FIs) can securities their assets. What is being envisaged is an independent law, carved out from the Sarfaesi, which will cover receivables under any contract. This is expected to give a fillip to the development of the securitisation market, which otherwise is restricted only to banks and FIs. Though Sarfaesi came into force almost two years ago, banks and FIs are undertaking securitisation transactions outside the purview of Sarfaesi by resorting to the Indian Contract Act, 1872 and the Transfer of Property Act, 1882. Banks and FIs are skirting Sarfaesi, as a Securitisation Company [special purpose vehicle (SPV)] floated under Sarfaesi Act has to have a minimum capital base of Rs. 2 crore. As an asset backed or mortgage backed security issued by an SPV outside the purview of Sarfaesi is not a ‘security receipt’ under the Securities Contract (Regulation) Act, 1956, the SPV can resort to only long-drawn civil proceedings in case an underlying asset turns bad. A SPV under the purview of Sarfaesi, however, can resort to summary recovery procedures. 

INFORMATION TECHNOLOGY

Indian software companies are scaling up and targeting niche segments by diversifying to IT consulting front. Margins are typically higher in consultancy compared to $20 per hour in vanilla services; rates in consulting are upwards at around $100 per hour. In the financial year 2004-05, host of Indian majors had started strengthening up their capabilities in this area. 

Infosys Technologies had set up a new subsidiary Infosys Consulting Inc., in Texas, USA, to handle its consulting business with an investment of $20 million. Initially, the company will be hiring around 75 employees in the US. 

Similarly, Tata Consulting Services (TCS) has acquired Phoenix lobal Solutions (PGS) from the Phoenix Companies Inc. for an undisclosed amount. PGS is a provider of technology business solutions to insurance companies across the globe. The current employee strength of PGS stands at 400 and its revenues are in the range of $12 - $13 million. In addition TCS has acquired Aviation Software Development Consultancy (ASDC), a company focussed on providing consulting and solutions to the aviation industry. 

Also, ICICI OneSource has acquired a 51 per cent stake in US-based Pipal Research, a company focusing on high-end customized business research, analytics and information services for an undisclosed amount. Pipal Research was founded in 2001 and caters to the financial services, pharmaceuticals biotechnology, utilities and IT sectors. Its clients include leading investment banks, commercial banks, accounting firms, management consulting firms, Fortune 500 consumer finance companies and global law firms. Pipal Research is ICICI OneSource’s third acquisition. The company made its first acquisition in May 2000 with CustomerAsset and its second with First Ring in July 2003. The current employee strength is over 400. 

Meanwhile, Wipro’s process consulting practice is now part of Wipro’s IT consulting practice. The company offers services such as business process improvement and Six Sigma consulting. 

Bank of Alexandria, a leading bank in Egypt, has signed with Infosys to implement the core banking solution “Finacle”, which will power the bank’s e-banking, CRM, financial management, asset-liability management and loan origination needs. 

Leading online portal Baazee.com has renamed itself to ‘eBayIndia’ (ebay.in). This follows the completion of integration process with Nasdaq-listed $3.3 million eBay Inc., which acquired the former for a consideration of $50 million in August 2004, making it a 100 per cent subsidiary. eBay’s online marketplace is spread across 32 countries with over 135 million registered users while Baazee.com has over one million registered users in India across 240 cities. Now Indian sellers will be able to sell in 32 countries and Indian buyers can buy in the international marketplace at the cheapest possible price. 

Satyam Computer Services Ltd. has bagged a 3-year SAP implementation contract from Bridgestone Corporation of Europe, a subsidiary of Bridgestone Japan, one of the biggest tyre and rubber manufactures in the world. 

National Association of Software and Service Companies (Nasscom) has signed a memorandum of understanding with University Grants Commission (UGC) for strengthening the development of information technology (IT) workforce in the country. As a part of the agreement, Nasscom and UGC will jointly undertake a ‘Faculty Development Programme’ for upgradation of the skill-sets and knowledge base – in emerging technologies and project management (related to information technology) for the existing technical faculty. Initially, 200 teachers from 10 UGC institutions will be provided training and this will be scaled up at a later stage. 

Dell has opened its third customer contact centre in India, which will handle telephone calls from consumers in the US and elsewhere around the world. The new facility, located in Mohali near Chandigarh, will initially recruit around 300 employees. The centre in being opened to support Dell’s huge growth of late. The company is now the world’s largest PC maker over Hewlett Packard (HP). But Dell has experienced growing pains in the recent past, causing some customers to criticise its service and support.

INSURANCE

The Life Insurance Corporation of India (LIC) has launched Bima Nivesh 2005 in place of the earlier Bima Nivesh 2004, single premium plan with guaranteed additions. This product was launched to pass on the benefits of slight increase in interest rates in the market by way of increased guaranteed additions to customers. 

SBI Life Insurance Company Ltd. has doubled its equity capital base to Rs.350 crore to support business growth plans and maintain solvency margins. The joint venture partners State Bank of India and Cardif SA of France have contributed the additional amount in proportion of their stake of 74:26. 

Amid stiff competition from private players, state-owned Life Insurance Corporation of India (LIC) increased its surplus by over 12.5 per cent to Rs.10,987.60 crore in 2003-04, while its assets crossed the Rs.4,00,000 crore mark in 2004. The insurance major distributed 95 per cent of the surplus (about Rs.10,483 crore) to over 14.11 crore policy holders by way of bonuses during 2003-04 and the remaining 5 per cent (Rs.548.13 crore) to the government. LIC’s total income was up by 16.45 per cent at Rs.73,342 crore and premium income was up by 15 per cent at Rs.46,531 crore till January in 2004-05.

TELECOM

The Tata group plans an additional investment of Rs.9000 crore in Tata Teleservices in 2005-06, which will include rolling out telecom services in 2,500 more towns by September 2005.

FINANCIAL MARKET DEVELOPMENTS

Capital Markets
Primary Market
Saksoft limited, a mid-sized software services company which specializes on banking and financial services, is entering the primary market for the first time to sell 25 lakh shares of Rs 10 each at a premium of Rs 20 each to raise an amount of Rs 7.5 crore. The issue is to open on March 30 and close on April 7. 

Gokaldas Exports Ltd, an apparel manufacturer, is entering the capital market with a public issue of 31.25 lakh shares of Rs 10 each at a price band of Rs 375 to Rs 425 per share. The issue is through 100 per cent book building, which is to open for subscription on March 30. 

Secondary Market
Due to the year-end concerns, margin payment pressures and selling by FIIs pulled the stock indices lower with the BSE sensex losing 257.47 points over the previous weeks close, to end at 6442.87 and NSE nifty recorded a loss of 93.75 points to close at 2015.40. The BSE sensex has lost close to 500 points over its intra-day high reached at 6954 on March 9. The markets remained bearish also due to the high global oil prices. As the hikes in petrol and diesel prices were announced, the prices of oil and gas stocks surged. 

Among the sectoral indices of BSE, almost all the indices have fallen over their previous week’s close. In terms of absolute change, the highest decline was witnessed by BSE metal indices, which fell by 437.6 points over the previous week. While the BSE 500 has fallen by 4.9 per cent, BSE sensex has declined by 3.8 per cent; similarly, NSE nifty fell by 4.4 per cent, while CNX Midcap 200 has declined by 5.3 per cent. 

During the week, the FIIs were net sellers in the last two of the four sessions in a holiday-shortened week; as a result, their net investment was only Rs 6.1 crore with purchases at Rs 3,294.4 crore and sales at Rs 3,288.3 crore. 

As per the latest data published by registrar and transfer agents (R&T), the share of retail investors in mutual funds has increased from Rs 9,540 crore to 11,918 crore between January and February (an increase of 25 per cent). Corporates’ share has increased from Rs 53,562 crore to Rs 60,554 crore, that is, an increase of 13 per cent and high networth individuals share has increased by just 4.2 per cent. 

The clause 49 of the listing agreement, which was to come into effect from April 1, has been deferred for nine months as some of the companies were facing difficulties complying with the requirements of the clause. The two major issues in the clause pertain to the number of independent directors on a company’s board and full accountability of chief executive officers and chief financial officers for any financial statement issued by them. 

Derivatives 
The futures and options (F&O) segment of stock exchanges at the beginning of the week was subdued but as the cash market turned volatile, it turned buoyant with the daily turnover rising from Rs 8,799 crore on March 21 to Rs 17,741 crore on March 23. It fell to Rs 13,857 crore on March 24. During the week, the FIIs were net sellers. 

Government Securities Market
Primary Market

In the 91-day treasury bills auctioned on March 23, the yield was set at 5.36 per cent sharply higher than that set in the previous week at 5.20 per cent. 

Secondary Market
Due to the pressure on liquidity on account of advance tax outflows, the call rates touched a peak of 5.04 per cent during the week. However, ahead of the long weekend, the call rates eased. The weighted average YTM on 10-year benchmark security, 7.38 per cent 2015, ruled at almost similar levels as those in pervious week ending March 18. After the Federal Open Market Committee (FOMC) of USA raised its federal funds rate by 25 basis points to 2.75 per cent, the yields rose, but soon declined, as the market participants remained cautious ahead of announcement of issuance calendar. The decline in the inflation rate and the finance ministers assurance to the market that there would be no rate hike in the next six-months were positives for the market. 

In the budget announced by the Maharashtra Government, the state finance minister has reduced stamp duty on government securities transactions by 95 per cent. Hence, instead of paying Rs 1000 as maximum stamp duty per leg of a buy or sell transaction, brokers will now need to pay only Rs 50. However, as stamp duty is not applicable for transactions executed on the negotiated dealing system, which account for 80 per cent of the total trades, it is unlikely to buoy the market sentiments 

Bonds Market
Sidbi is to raise Rs 1,500 crore in the coming fiscal through the issue of capital gain bonds. 

Foreign Exchange Market
The dollar rose to a two-week high against the euro and yen after the chief executive of HongKong Monetary Authority Joseph Yam suggested that Asian central banks shouldn’t rush to boost euro holdings at the expense of dollar as this may undermine the stability of international finance. As a result, the dollar touched a six-week high against the yen and five-week high against the euro. The rupee, therefore, depreciated against the dollar from Rs 43.67 on March 21 to Rs 43.83 on March 24. Interestingly, the six-month forward premia remained unchanged during the period under review at around 1.54 per cent. 

Commodities Futures
The government of Maharashtra has reduced the stamp duty on commodity market transactions by 90 per cent. 
As per the data published by the Forward Markets Commission (FMC), the commodity exchanges together have registered the highest turnover of Rs 51,000 crore in the first fortnight of March. The NCDEX registered trading worth Rs 27,018 crore, followed by MCX at Rs 16,615 crore and by National Board of Trade (NBOT) at Rs 2,894 crore. On March 8, NCDEX recorded a trading of Rs 3,101 crore on a single day, which is the highest turnover ever witnessed by any commodity exchange so far.

INFLATION

The annual inflation based on wholesale price index fell marginally to 5.2 per cent during the week ended March 12, 2005 from 5.3 per cent registered during the previous week. The annual inflation was at 4.8 per cent in the corresponding week last year. 

A marginal decline by 0.07 per cent in the year-on-year inflation in the latest week was marked, despite a surge in the prices of vegetables and some of the manufactured products. The WPI was marginally up at 189.1 (Base: 1993-94=100) during the week as compared to the previous week. The index of primary articles’ group rose marginally to 185.2 due to a surge in the prices of both, food and non-food articles. The index of fuel, power, light and lubricants group stood firm at the previous week’s level of 289. The highly-weighted (63.7 per cent) ‘manufactured products’ group rose marginally to 168.2 due to a rise in the price indices of food products, non-metallic mineral products, basic metals and machinery and transport equipments. 

The latest final index of WPI for the week ended January 15, 2005 has again been revised upwards; as a result both, the absolute index and the implied inflation rate moved up to 188.7 and 5.5 per cent instead of the provisional levels of 188.6 and 5.4 per cent, respectively. 

PUBLIC FINANCE

State Budgets

The state budget for West Bengal, which was presented by state finance minister on March 21, 2005 seems to have stuck to the lefts agenda as outlined by the common minimum programme. The state budget has focussed on various aspects of agriculture. The targeted growth rate was set at 8 per cent, which is above the national average. Total receipts of the state stood at Rs 1,11,964 crore in 2004-05. Revenue expenditure was Rs 31,137 crore, while capital expenditure of the state stood at Rs 1,692 crore in the current fiscal year. Revenue deficit stood at Rs 9,796 crore. The budget raised plan allocation for sectors like agriculture, infrastructure, rural employment and backward classes to Rs 7,051 core in 2005-06 from Rs 4,184 crore in the current fiscal year. The finance minister also proposed to buy lands from willing sellers at market prices and distribute to landless labourers. The minister has also provided an additional outlay of Rs 20 crore for land and land reforms department. Outlay for horticulture was increased to Rs 47 crore. The budget has also proposed to bring an additional area of 2 lakh hectares under irrigation. The overall plan outlay for the total sector of irrigation and flood control has also been increased to Rs 297 crore. The state along with RBI and other banks will disburse around Rs 3,000 crore to enhance credit flow to the agriculture sector.

Budget for Maharashtra state was announced on March 22. The state finance minister has targeted a fiscal deficit of Rs 8,852 crore. As per the revised estimates the fiscal deficit for the current year stood at Rs 13,775 crore. While budget for 2004-05 had estimated borrowings of Rs 10,052 crore, the revised estimates put borrowings at Rs 13,477 crore. The finance minister has targeted borrowings to be at Rs 8,894 crore for the next fiscal year. He further plans to achieve a revenue account surplus of Rs 268 crore by taking a higher than usual share of taxes from the centre along with pruning the plan expenditure of the state. The state finance minister has announced a tax holiday on stamp duty for housing loans upto Rs 1 lakh. Similarly stamp duty for housing loans upto Rs 10 lakh will be reduced by 50 per cent. The stamp duty for commodity transaction has been reduced by 90 per cent and that for gilt trades by 95 per cent.

The budget for Uttaranchal was presented on March 21, 2005. The fiscal deficit for the state was at Rs 482.86 crore, while the revenue deficit was recorded at Rs 433.59 crore. The budget has however not imposed any new taxes.

The budget for the state of Punjab, has estimated a budget deficit of Rs 2,118.46 crore for the next fiscal year as against Rs 2,918.09 crore according to the revised estimate for 2004-05. The annual plan for 2005-06 has been fixed at Rs 3,550 crore as against the revised plan estimate of Rs 2,750 crore for 2004-05.

VAT update
The empowered committee of state finance ministers on the value added tax (VAT) has reduced tax liability under the composition scheme from 1 per cent to 0.25 per cent. Traders with turnover of upto Rs 5 –50 lakh can opt for this composition scheme, but they will not be entitled to claim the Vat credit. Asim Dasgupta has also said that the committee would review the VAT rates of 4 per cent and 12.5 per cent.

Maharashtra state government is set to shift to the VAT regime from the current sales tax regime. With the implementation of this, the effective tax would come down from the current rate of 17.5 per cent to 12.5 per cent. The estimated loss in rupee terms is around Rs 2,400 crore. Orissa on the other hand expects a loss of about Rs 750 crore. It currently collects Rs 400 crore from central sales tax. While Andhra Pradesh expects to lose revenue worth Rs 700-800 crore, with the implementation of VAT, experts are of the opinion that the loss may not be of that magnitude as only 97 products have been brought under the 4 per cent bracket, while the rest attract 12.5 per cent.

Karnataka will lose about Rs 2,160 crore in terms of revenue with the implementation of VAT. The state is set to impose VAT on all commodities except petrol, aviation turbine fuel, diesel and sugarcane. The state has further decided to exempt some of the foodgrains, and items like paddy, wheat, bread, bun and rice flakes.

Others
The government is set to arm the excise department with the power to provisionally attach assets, including property, when assessments are still pending. The idea is to recover dues that are likely to arise from such assessments and prevent the defaulting companies from liquidating or transferring their assets, atleast in the near term. Currently only the income tax authorities are given such powers.

The income tax department has asked 90 foreign companies operating in India to pay additional tax under the newly incorporated transfer pricing rules. These foreign companies include over 25 foreign banks, diamond firms and pharmaceutical companies. Most of the international banks have been asked to pay additional taxes as it was found that local branches of foreign banks did not charge or charged only partly for services rendered by it to their parent bank or the bank’s branches abroad or subsidiaries in the other countries. In case of the diamond firms, the fee charged for polishing diamonds was not in line with the international price. In case of pharmaceutical companies, the transfer pricing authorities have decided that the clinical trials conducted on behalf of their parent companies or branches elsewhere, were not in line with international market charges.

LABOUR

The government has decided to release an additional installment of dearness allowance (DA) to the central government employees and dearness relief to pensioners, which would cost the exchequer Rs.1,608.2 crore in a full year (2005-06). The DA rate has been hiked from 14 per cent to 17 per cent for all central government employees. A 3 per cent hike, which would be effective from January 1, 2005, would cost Rs. 1874.3 crore in the fiscal 2005-06 (January 2005 to February 2006), including retrospective impact from January this year.

EXTERNAL SECTOR

External Trade
China is pushing for a free trade agreement (FTA) with India which, it claims, would result in the biggest free trade region in the world. The Chinese Ambassador said that the two governments were working seriously to finalise by the end of the month the programme for the development of India-China trade and economic co-operation for the next five years. The programme will be announced during the Chinese Premier Wen Jiabo’s India visit next month. 

The central government targets 42 per cent growth in processed food exports in two years. The government would introduce an integrated food law to boost the sector. 

High freight cost and uncertain policy environment are the major problems being faced by engineering goods exporters. Exports are steadily increasing with the sector registering 40 per cent growth during April-October 2004-05. Interestingly, while it is demand from China which is primarily responsible for the unusually high growth achieved during 2004-05, the stiffest competition being faced by Indian exporters is again from China. 

IT exports to EU countries have recorded a remarkable growth of 37.19 per cent though North America continued to be the top destination, according to the electronics and computer software export promotion council.

FDI
India received Rs 14,232.42 crore worth of FDI in first nine months 2004-05 as compared to Rs 12,117.36 crore during 2003-04. According to the minister of state for commerce and industry, the highest FDI of Rs 2,482.74 crore was received in electrical equipment manufacturing. Top five sectors attracting FDI inflow since 2000-01 are electrical equipments, telecommunications, fuel (power and oil refinery), transportation industry and services sectors. 
Retailers, at least those involved in food, may no longer have to wait for FDI approval. A brand based approach is set to take off with the entry of SPAR International (an association of retailers), a Netherlands based multi-national food retail chain. SPAR looks at tying up with existing neighbourhood large kirana and food stores besides assisting insetting up new stores, through its licensee Radhakrishna Foodland, the Warburg Pincus funded privately held company. 

Policy issues
Parliament approved the Patents Amendment Bill, which seeks to introduce product patent in drugs and agricultural products, after Rajya Sabha passed it. The Bill was approved by the Lok Sabha after incorporating 15 amendments. 

In a move that could have major implications for India, a member of the European Parliament is proposing a ban on import of products stemming from child labour to the 25 member European Union. India is estimated to have 40 million or about 16 per cent of the total child labourers in the world. 

According to senior government officials, foreign trade policy (FTP) 2005-06 would be devoid of new export promotion schemes. It could, however, spell out a new mechanism for additional tax rebate for sectors holding high export growth potential such as textiles, leather, auto components and pharmaceuticals.

Issues related to the external sector
India has sought China’s partnership to acquire international energy projects as it believes that competition between the two pushes up bid prices of properties. 

To maximize its bargaining power in the on-going services negotiations at the World Trade Organisation (WTO), India has decided to make its offers related to commercial presence of service providers (Mode 3) contingent upon more liberal offers from developed countries in the area of cross-border trade in services (Mode 1) and cross border movement of personnel (Mode 4). India’s second list of offers for submission to WTO as part of the on-going services negotiations is almost ready and will be placed before the Cabinet for clearance next month. 

The information and broadcasting minister said that the government was taking a close look at allowing facsimile edition of foreign newspapers in India. 

Seafood exporters are all set to move the court of International Trade against the US non-tariff barrier imposed on shrimp exports in the form of customs bonds. With the imposition of 10.35 per cent anti-dumping duty on Indian shrimps, by the US, exporters besides paying the duty have also to furnish bonds to the tune of 10 per cent, the full value of duty on a year’s exports.

Even as China’s software industry has achieved remarkable growth in recent years, it has displayed apparent weaknesses vis-à-vis India in this sphere. 

INTERNATIONAL ISSUES

The US
The US consumer prices increased more than expected in February 2005. The consumer price index rose 0.4 per cent in February after a 0.1 per cent increase in January 2005. According to the Labour department, 2 per cent increase in energy prices accounted for most of the acceleration. The Fed took note of growing inflationary pressures on March 22, 2005 as it increased overnight borrowing costs by a quarter percentage point to 2.75 per cent.

Japan
Japan’s trade surplus shrank in February 2005 from that a year earlier for the second month in a row as exports to crucial markets such as China weakened, casting doubts whether the economy was safely out of recession. The trade surplus declined by 21.7 per cent from the same month a year earlier. 

Euro region
The decline in Italian business confidence and a similar drop in sentiment in Germany suggest that the 12-nation economy of the euro region in struggling to gain momentum. 

European Union finance ministers bowed to German pressure to ease restrictions on budget deficits, seeking to boost an economy that has lagged behind the US for 12 of the last 13 years. Finance ministers agreed to let countries, using the euro, surpass the deficit ceiling of 3 per cent of GDP when growth is sluggish or ‘relevant factors’, such as Germany’s cost for rebuilding its ex-communist east.

France
Consumer spending in France, Europe’s third largest economy, probably fell for the second time in three months in February as unemployment and energy costs rose. French joblessness reached a five year high of 10.1 per cent in January, curbing spending and hurting sales at companies such as Galaries Lafayette SA, the France’s biggest department store operator. 

Italy
Confidence among manufacturers in Italy, Europe’s fourth biggest economy, unexpectedly fell to the lowest in almost two years in March 2005 as the euro’s increase led to fewer orders and damped production expectations. 

China
China’s parliament has approved a defence budget of $ 30 billion, an increase of 12.6 per cent from 2004, for a second straight year of double-digit growth. Officials say the increase is aimed at modernization, not preparations for war. 

Oman
Oman will take its first step into oil trading this summer with the help of a leading private firm, becoming the most aggressive Middle East producer to venture into speculative trade.

CREDIT RATINGS

Crisil has assigned a P1 rating to Family Health Plan’s (FHPL) Rs. 3.5 crore commercial programme. The assigned rating takes into account the FHPL’s significant market share of over 23 per cent in the third-party administrator (TPA) segment of the health services industry and the support that FHPL receives from the Apollo Hospitals group, of which it is a part. 

Icra has upgraded the long-term ratings assigned to HUDCO’s Rs. 1,148 crore bond programme to LAA from LAA-, simultaneously, it also upgraded the rating assigned to HUDCO’s FD programme to MAA from MAA-. However, both the ratings are constrained by HUDCO’s large exposure to state-level entities which are backed by the State government guarantees, given the deteriorating financial health of most state governments. 

In an another exercise, Icra has assigned an A1+ rating to GE Capital Transportation Services’ (GECTFS) Rs. 100 crore commercial paper programme. The rating factors in the stringent credit appraisal and recovery systems in place have resulted in moderate delinquencies. It has also assigned an LAA- rating to Trent’s (a Tata Group company) Rs. 65.5 crore non-convertible debentures (NCD). 

While, in yet another exercise, it has withdrawn the LC rating given to the Rs. 14.81 crore NCDs of Madras Fertilisers since the instrument has been fully redeemed.

Fitch has assigned AAA rating with stable outlook to the Rs. 50 crore subordinated debt of Kotak Mahindra Bank and it has also reaffirmed the AAA rating assigned earlier to the Bank’s existing subordinated debt of Rs. 100 crore and Rs. 30 crore, respectively.

Care has assigned AAA rating to the ICICI Bank Ltd.’s proposed Tier-II bond issue amounting to Rs. 450 crore.

In an another exercise, the rating agency has downgraded the Lord Krishna Bank Ltd’s tier-II bonds aggregating to Rs. 50.7 crore from A to A-, taking into account the bank’s small size and the decline in its overall profitability for this fiscal year.

Standard and Poor’s, an international rating agency (S&P) has assigned Tata Iron and Steel Company Ltd. (TISCO) ‘BBB’ local currency rating and ‘BB+’ foreign currency rating with stable outlook. 

Theme of the week:

MERGERS & ACQUISITIONS in INDIAN INDUSTRY

Mergers & Acquisitions (M&As) : the Rationale

1. M&As have become an invincible part of business practices and management. In India, this has been so particularly following the liberalization process that began in 1991.

Motivations for M&As are varied:

• Market dominance
• Economies of Scale: Cost and size efficiency
• Product portfolio diversification
• Regional spread of business
• Cross-border penetration
• Minimization of competition
• Consumer base expansion
• Vertical and horizontal integration

2. M&As could lead to increased efficiencies through cost savings from economies of scale. They may provide scope for greater access to key inputs. By combining marketing, sales promotion and distribution or by cutting down on overlapping research and development, they facilitate corporate competitiveness. Another effect of M&As is that they increase the degree of concentration by reducing the number of firms in an industry. With a merger, there is a possibility that a large increase in market power would create a situation that sets prices above the competitive levels. M&As could also be undertaken to compensate for instabilities such as demand fluctuations and thus provide for better margins and technological shocks. Firms may even embrace M&As with the sole objective of growing in size. They could also emanate from availability of capital to finance acquisitions. 

Liberalization and M&As
1. With economic liberalization introduced in the early 1990s, there has been a rapid 
growth in number of M&As and also in cross-border mergers. 

2. The second half of the 1990s saw a rapid growth in participation of MNCs in M&As. During 1995-00 the MNEs’ participation was to the extent of 32 per cent of M&As as against less than 10 per cent during 1990-95, obviously, the outcome of the liberalization policy. The year 1991 witnessed the scrapping of the restrictive provisions of the Monopolies and Restrictive Trade Practices (MRTP) Act and in 1993, the Foreign Exchange and Regulation Act (FERA) was considerably modified to facilitate larger inflow of foreign capital combined with technology and modern management practices. A number of other enabling laws and administrative procedure were been put in place to facilitate M&As. 

M&As in 2003 & 2004
3. According to the Bloomberg data, M&As have increased by over 70 per cent in India recording $ 7.85 billion in value in the calendar year 2004 as compared with $ 4.55 billion registered in 2003. The private equity firms that showed interest in India accounted for $ 1.33 billion of the local M&A deals. An example of this has been Warburg Pincus picking up a 29 per cent stake in Max India.

4. The cross-border deals have taken place both in the form of inward and outward transactions. With foreign companies acquiring information technology and telecom entities in India, inward transactions have increased. Inward M&A deals included Barclays’ acquisition of 60 per cent stake in Intelnet for $ 34.91 million, and online auctions giant E-Bay’s purchase of Bazee.com for $ 50.34 million. The inward transactions increased considerably probably because overseas companies found it far more economical to acquire existing setups than go for organic growth. Outbound transactions too increased significantly with Indian manufacturing companies acquiring entities overseas. To name few, Tata Chemicals Ltd acquired a 33 per cent stake in Morocco based chemical company, Indo Maroc Phosphore S.A for a consideration of Rs 133 crore. The Gautam Thapar controlled Crompton Greaves is acquiring the Pauwels Group, a Belgium based power transformer and distribution transformer company for euro 32.10 million. TVS Logistics Services Limited acquired a 80 per cent stake in the UK based CJ Components Limited for a consideration of Rs 3.5 crore as part of its global expansion plan in the auto components supply chain business. 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.

5. With lower global interest rates, a lot of M&As also took place driven by equity-linked offerings. Further, the move allowing corporates to raise up to $ 500 million external commercial borrowings (ECBs) under the automatic route increased the number of such offerings. These include L&Ts convertible bond of $ 150 million, Tata Motors’ issue for $ 100 million and Zee Telefilms’ for $ 100 million. 

6. According to the KPMG Corporate Finance Report, in 2004, the biggest M&A deal in India was worth $ 378 million. It was Hewlett Packard’s buyout of Digital GlobalSoft after which the combined entity acquired HP India’s software business. In 2004, the M&As activity in the country was led by the telecommunications sector, which accounted for 21 per cent of all the deals. The major telecom deals included Reliance’s acquisition of Flag Telecom, Idea Cellular’s acquisition of Escotel, Bharti’s acquisition of Hexacom and Qualcomm’s investment in Reliance Infocomm. 

7. The media information and software sector accounted for 19 per cent of the M&A deals, while industrial manufacturing contributed 12 per cent. This was a significant shift from 2003, which had witnessed several deals in the chemicals, petrochemicals, and oil and gas sectors. Inbound investments were mostly from the US, UK and Singapore. According to the KPMG report, there were 38 outbound M&As, largely led by the Oil and Natural Gas Corporation’s continued acquisition of oil exploration blocks in Australia, Sudan and Ivory Coast. 

8. Other large deals in the automotive sector included Tata Motors’ acquisition of Daewoo’s truck assets in South Korea and Mahindra and Mahindra’s acquisition of Jiangling tractor manufacturing assets in China, and Bristlecone Inc in the US. However, according to the report, the number of M&As in India declined by 25 per cent in 2004, compared to the previous year, despite a global spurt in M&A activity. In variance to the Bloomberg data. the KPMG report stated that as many as 258 M&A deals, worth $ 5.6 billion, were concluded in 2004. Despite a drop in the numbers, the deal values remained stagnant in 2004, indicating an increase in the average deal size as per the KPMG report. The report states that there is a shift from organic growth to consolidation and buy-out. 

9. Another estimate made states that the venture capital and private equity firms invested over $ 1.1 billion in 66 Indian companies during 2004. The amount invested was significantly more compared to the $ 774 million invested during 2003.

Policy Issues
10. Among the policy issues, the Securities and Exchange Board of India (Sebi) has decided to curtail the availability of creeping acquisition route to promoters who hold more than 55 per cent in a company. Such promoters will have to make a mandatory open offer if they wish to raise their holdings over 55 per cent. Earlier, the cut off was at 75 per cent. The amended regulations do not allow promoters to hike their stake beyond the 55 per cent mark even through the preferential allotment route.

11. The government has notified through PN 18 a protection mechanism. Established domestic players align with an MNC with the prospect of globalising. But as an MNC gets familiarized with the domestic environment or if the business needs capital to match the growth objectives of the MNC, it leads to the ending of the joint venture. In relation to this and the interest of MNCs to operate on their own, as a measure of protective intent, the government notified PN 18. According to PN 18, any foreign entity that has an existing or previous venture or tieup had to get a ‘No Objection Certificate’ from its existing Indian partner before setting up another business in the same or allied field. However, in its application and abuse by some Indian partners, it resulted in questioning the operational validity of such protection for Indian partners. 

12. The government have therefore recently notified PN 1 (2005) whereby the course of future joint ventures and the implications on the partners upon termination is now very much left to contractual arrangements. This has reduced the legislative protection for termination or operation of the partners for the joint ventures. PN 18 thus stands rescinded 

Recent major M&As
13. Bangalore based software and BPO services firm Mphasis is acquiring US-based IT healthcare company Eldorado Computing for $ 16.5 million, in an all-cash deal. Private equity fund Warburg Pincus sold 6 per cent of its stake in Bharti Televentures for $ 561 million or about Rs 2,500 crore.

Advantages and challenges
14. The significant rise in number of Indian companies’ acquisitions abroad are either with the objective of becoming a multinational player or in some cases compelled by changing dynamics of the local market. The spirit of conquest abroad has to be sustained. The fragmented industries on the domestic front have to be consolidated by M&As to emerge as strong players. Such entities could reap the benefit of their increase in market share. Deals could be in different forms. 

For instance, 

a. Company acquisitions
b. Mergers of group companies
c. Joint venture agreements and 
d. Co-promoter buyouts 

These could also be in form of 
• Acquisitions of local companies by domestic players
• Overseas acquisitions by Indian companies and 
• Takeovers of Indian businesses by foreign majors 

15. M&As are intended to acquire complementary product portfolios and to increase the company’s leverage with distributors and large retailers. They are also to facilitate use of an integrated distribution network, which could result in higher volumes and lower logistic costs. They are also meant to integrate operations – backward or forward. M&As by Indian players with local domestic companies strengthen the position of the Indian players in the domestic market. These Indian companies are thus well-placed to successfully overcome competition from foreign companies. The cost efficiency achieved through M&As thereby benefits the domestic players. 

16. Overseas acquisitions by Indian companies establishes their presence as MNCs. These firms thus benefit from globalization. Penetration in foreign markets through M&As places them in a stronger position in the global market. Takeovers of Indian businesses by foreign majors enhance overall investment from foreign capital inflow. It releases capital of the related domestic company for better investment in other business segment. M&As activity also leads to gain for investors who look for likely acquisition candidates trading at valuations far below fair value. As players consider M&As as a route to growth and more foreign players look to enter the market, the related shareholders are likely to benefit in the process. 

17. But alliances also involve challenges. For cross-border mergers, cultural clash has to be pre-considered. Even fundamental differences between the national, commercial, and legal systems of partner countries must be taken into consideration. Contingency planning is particularly important in cross-border alliances. While entering into partnership, partners should thoroughly understand and align their respective motivations. Unless the two partners have an alignment in terms of long-term need for each other, a joint venture between them could result in termination sooner or later. 

18. The sizeable growth in M&As following liberalization since 1991 reflects the buoyancy in business deals within the country. In 2005, there have been three significant deals, viz., Holcim-ACC, Dabur-Balsara and P&G-Gillette. M&As facilitate business growth. It provides the necessary tools for Indian companies for successfully overcoming competition in the domestic as well as the global market. M&As also with efficient management would result in profitable Indian corporate entities enlarging their market share and enhancing their profitability.

 

*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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