Current Economic Statistics and Review For the Week 
Ended May 28, 2005 (22^nd Weekly Report of 2005)

  I

Highlights of  Current Economic Scene

CORPORATE SECTOR

• The J.J. Irani Committee, which is drafting the New Companies Act, is proposing to give quasi-judicial powers to the Registrar of Companies (RoCs) to impose fines and penalties on erring companies. It also proposes fines and penalties to be proportionate to the size of the company, volume of activities, seriousness and recurrence profile of the offence and the nature of the business of the company.

• Currently, over 45,000 cases filed by RoCs under the Companies Act are pending in various courts in the country. Judicial disposal of these cases takes up to an average 10 years. Moreover, most of these pertain to technical or trivial offences.  

• Hence, with the implementation of these proposals, it is expected that swift, stringent and time bound follow-up action will be taken up by the RoCs themselves.   

• Policy Issues:

• With the objective of expanding bilateral air services in a phased manner, a Memorandum of Understanding (MoU) was signed between Government of India and Government of Germany. Lufthansa like other international airlines is set to benefit, as it will be able to meet the growing demands of the Indian market.

• Alembic Limited received USFDA approval for manufacturing its Active Pharmaceuticals Ingredients (API) product, Leflunomide. This approval was met without any non-compliance issues under Clause 483.

•  Cabinet Committee on Economic Affairs (CCEA) approved grant of subsidy worth Rs.93 crores for production of orthodox tea for leaf grades and dust grades. This is for the period from January 01, 2005 to March 31, 2007. This is expected to boost the development of tea plantation sector in India .

• CCEA also approved a relief package in order to revive the coffee sector. The Department of Commerce has been provided an additional budgetary allocation worth Rs.95.7 crores during 2005-06 to meet the Government’s share of the interest on Special Coffee Term Loan (SCTL).

• Bombay High Court has sanctioned the scheme of amalgamation between Videocon Industries Ltd and Petrocon India Ltd. The deal has also obtained approval from the Government of India.

• National Thermal Power Corporation Limited (NTPC) has signed a MoU with Defence Metallurgical Research Laboratory (DRML). NTPC will be responsible for technical and logistical support for the development of gas turbine blades and DRML will be responsible for development of casting, heating and heat treatment.

• New Venture:

• Coca-Cola India Limited opened a juice manufacturing facitiy at Bareilly , Uttar Pradesh. Brindavan Beverages Private Limited –Coca-Cola’s franchisee bottler- has invested Rs.40 crores to meet the rising demand for ‘Maaza’ in northern, central, eastern and western part of India . Coca-Cola will provide the technical and marketing support to Brindavan Beverages Private Limited.

• Mergers & Acquisitions:

• GlaxoSmithKline Pharmaceuticals Ltd. has entered into an alliance with Japan ’s Elisa Company to sell drug named, “Paritec” in India . It is useful in gastritis, peptic ulcer, reflux oesophagitis.

• Tata Chemcials has made a bid to acquire Egyptian Fertilizers Company SAE through its wholly owned subsidiary, Homefield International Private Limited.

• Company Issues:

• Infosys Technologies Limited announced the pricing of its sponsored secondary offering of 14,000,000 American Depository Shares (ADSs) at a price of US$67 per ADS.

• Post its approval from the Board of Directors, DCM Shriram is set to enhance its sugar plant capacity from 8,000 TCD to 12,000 TCD coupled with modernization of the sugar plant and power house.

• Four Soft Ltd is set to acquire a Singapore based software solutions provider, Comex Frontier for approximately SG$ 2.10 million. Four Soft has entered into Share Purchasing Agreement for acquiring 100 per cent share of the latter.

• With a view to expand it’s CDMA network, Tata Teleservices is set to invest Rs.600 crores in Kolkata, Orissa, Jharkhand and Bihar circles. A major portion of this investment will go towards financing installation of additional 350-400 cell sites.

• Larsen & Turbo (L&T) Limited would sell 50 per cent stake in its joint venture (JV) with L&T Niro Ltd. and transfer the related business of building plants for the dairy industry to its partner Niro A/S Denmark. L&T is keen on focusing on its core sectors as they provide higher growth opportunities.

• Maruti Udyog Limited has set a target of producing six lakh vehicles in 2005-06. It will focus more on domestic demand rather than on exports.

• Pantaloon Retail ( India ) Ltd. will invest Rs.100 crores in IT infrastructure in the next three years in order to support the explosive growth witnessed by the retail sector. It has entered into a strategic alliance with SAP.

• Nagarjuna Construction Company Limited bagged orders worth Rs.258 crores from various clients such as Gujarat Water Resources Development Corporation, Karnataka Road Development Corporation and Assam State Electricity Board.

• Company results:

• ITC registered a healthy growth of 18.1 per cent y-o-y in net sales, from Rs.6,470 crores in 2003-04 to Rs.7,639 crores in 2004-05. Non-cigarette businesses such as hotels and paper and packaging did well in 2004-05.

• Larsen & Turbo recorded a turnover of Rs.13,091 crores in 2004-05 up from Rs.9,561 crores in 2003-04, a rise of 36.9 per cent. This was mainly due to a robust 38.6 per cent growth of the engineering and construction segment. (It stood at Rs.8,245 crores in 2003-04 and Rs.11,429 crores in 2004-05).

• Crompton Greaves’s net profit grew by a healthy 62% y-o-y, from Rs.70.8 crores in 2003-04 to Rs.114.7 crores in 2004-05. Among different segments, industrial systems generated maximum revenue growth of 25.7 per cent, from Rs.453.8 crores in 2003-04 to Rs.570.6 crores in 2004-05.

• Britannia Industries posted an increase of 25.2 per cent in net profits from Rs.148.8 crores in 2003-04 to Rs.118.8 crores in 2004-05. In the period under review, revenues stood at Rs.1,587.5 crores.

• The upswing in the auto ancillary sector resulted in a handsome 46.5 per cent rise in net sales of Bharat Forge, to Rs.1,219 crores in 2004-05.  Net profits grew by 26 per cent from Rs.124.9 crores in 2003-04 to Rs.161.6 crores in 2004-05.

• Tamil Nadu Newsprint and Papers’ net income grew by 14 per cent y-o-y from Rs.612.09 crores in 2003-04 to Rs.698.45 crores in 2004-05. However, net profit dipped by 42.8 per cent y-o-y from Rs.68.58 crores in 2003-04 to Rs.39.17 crores in 2004-05.

• Steel Authority of India (SAIL) recorded a noteworthy 171.3 per cent growth in net profit, from Rs.2,512.1 crores in 2003-04 to Rs.6,816.9 crores in 2004-05. Bhilai, Durgapur and Rourkela Steel Plants generated maximum sales.

• Hindustan Petroleum Corporation Limited (HPCL) registered a net loss of 32.9 per cent as a subsidy burden and rising international crude prices took a toll on its financials. However, it did record a turnover of Rs.59,793 crores in 2004-05 up from Rs.51,517 crores in 2003-04.

• Asahi India Glass’s net profit grew a modest 9 per cent from Rs.71.7 crores in 2003-04 to Rs.78.2 crores in 2004-05. It registered a turnover of Rs.596 crores in 2004-05 up from Rs.495 crores in 2003-04.

• Shasun Chemicals’s net sales registered a growth in net profit of 30 per cent, from Rs.23.8 crores in 2003-04 to Rs.31 crores in 2004-05. It recorded net sales of Rs.337 crores in 2004-05 in comparison to Rs.277 crores in 2003-04.

BANKING HIGHLIGHTS

• Western Union has entered into a strategic relationship with UCO Bank to provide in-bound money transfer services. In the first phase, Western Union ’s money transfer service will be available at over 300 branches of UCO Bank. Over the next few months, 700 more branches will be offering this service.

• The Reserve Bank of India (RBI) has cancelled the certificate of registration granted to Mumbai-based Bhojwani Leasing and Finance Ltd. for carrying on the business of a non-banking financial company. The company has also been prohibited from acceptance of deposits.

• Bank of India’s net profit has declined to Rs.313.71 crore in 2004-05 from Rs.1,050.7 crore in the previous fiscal. 

• Small Industries Development Bank of India (SIDBI)’s net profit has declined by 7.41 per cent to Rs.225 crore during 2004-05 from Rs.243 crore in the previous fiscal.

• Oriental Bank of Commerce has posted 10.8 per cent rise in its net profit at Rs.760.1 crore during 2004-05 over Rs.686 crore in 2003-04, the bank has declared 30 per cent dividend for shareholders.

 HOUSING

• The apex bank for mortgage financing, National Housing Bank (NHB) has raised Rs.800 crore through bonds and commercial papers (CP) issuances. The bank has issued 90-day CP of Rs.300 crore at 5.42 per cent.

 INSURANCE

• Bancassurance has contributed significantly to the sale of insurance products of the private insurance players. Bancassurance is the sale of insurance products through the bank branches (Table 1). Almost all insurance companies have signed up with a number of banks to act as their corporate agents for the sale of insurance products. Since last 2-3 years private sector as well as public sector banks have tied up with private and public insurance companies for selling insurance products. SBI Life insurance reported a rise of 166 per cent in its premium income to Rs.611 crore for the fiscal 2004-05 up from Rs.225 crore in the previous year. In 2004-05, SBI’s bancassurance business accounted for 67 per cent of the total premium income. Likewise, HDFC Standard Life has also reported a rise of 132 per cent in its premium income to Rs.486 crore in 2004-05 up from Rs.298 crore in 2003-04. Of its total premium income, 37 per cent had come by way of sales through bancassurance.

 TELECOM

o       Private GSM cellular operators have registered a one per cent increase in their average revenue per user (ARPU). Subsequently, during January – March 2005, the ARPU witnessed a rise to Rs.400 per month up from to Rs.396 in the preceding quarter, October – December 2004. According to Cellular Operators Association of India (COAI), the body representing all GSM players, Hutch continued to be the GSM operator with the highest ARPU at Rs.469.93, followed by Bharati at Rs.427.90, Idea at Rs.381.17 and BPL at Rs.310.57. In the first quarter of the current financial year, the Delhi circle recorded the highest ARPU at Rs.514.50 followed by the Mumbai circle at Rs.483.20. For the fiscal year 2004-05, the adjusted gross revenues (AGR) of GSM operators increased by 48.2 per cent to Rs.12,309 crore up from Rs.8,304 crore in 2003-04.

• In a major benefit to consumers in four states, ministry of telecommunications has announced that calls between Chennai and Tamil Nadu, Kolkata and West Bengal, Mumbai and Maharashtra and Uttar Pradesh (East) and Uttar Pradesh (West) will be charged as local calls. Till now, calls between the three metro cities and their respective states and the two parts of UP were long distance (STD) ones and the consumers had to pay for roaming. Under the new facility, calls from mobile-to-mobile and fixed-to-mobile will be charged as local call. Under the new scheme, there would be no roaming charges between Mumbai and Maharashtra, Chennai and Tamil Nadu, Kolkata and West Bengal, UP (East) and UP (West). These changes would be effective from May 25, 2005. Initially, the mobile service licences were given in four metros of Delhi , Chennai, Mumbai and Kolkata and later granted in telecom circles. Thus, there are separate mobile service licences for Kolkata, Mumbai and Chennai and other parts of the respective states. In the case of Uttar Pradesh, the telecom circle was bifurcated for better development and administration of telecom services.

FINANCIAL MARKET DEVELOPMENTS  

• Capital Markets  

•   Primary Market

o       Sebi is likely to do away with the d SP industries, a Delhi-based knitwear and garment manufacturer, is planning to enter the market to raise around Rs 60 crore through an IPO of 90 lakh shares of Rs 10 each, this would be  through 100 per cent book-building route. Of the issue proceeds, about Rs 35 crore will go towards capacity expansion and the rest towards working capital expenses.

o       Indian Bank has proposed to enter the market through an IPO, wherein the holdings of the government would be reduced from 100 per cent to 70 per cent. The bank expects to mobilise substantial tier-I capital through this issue and subsequently it will try to raise tier-II capital by way of a bond issue. 

•   Secondary Market

o       The market sentiments were buoyant during the week, following impressive results of some index companies and government’s decision to divest 10 per cent of its equity in BHEL. The BSE sensex gained 208.22 points or 3.21 per cent over the previous weeks’ close. After a long hiatus in BSE sensex closed above the psychologically important barrier of 6700, which it had last closed on March 18, 2005. NSE nifty also registered gains of 84 points to end the week at 2076.40. 

o       All the sectoral indices of BSE have registered gains during the week, with the highest gains being recorded by the BSE health care index. While the BSE sensex rose by 3.2 per cent, the BSE mid-cap and small-cap indices rose by 0.69 per cent and 0.10 per cent, respectively.   

o       Between May 1 and May 27, the FIIs remained net sellers of equities to the extent of Rs 878.50 crore with sales of Rs 14,704.30 crore and purchases of Rs 13,825.50 crore. They were net sellers even in debt market to the extent of Rs 245.70 crore with sales of Rs 501.50 crore and purchases of Rs 255.90 crore over the same period. During the week under review, they were net sellers on four trading days out of five. 

o       Mutual funds have been net buyers of equities; between May 1 and May 30, they were net investors to the extent of Rs 3,420.36 crore with purchases of Rs 6,812.49 crore and sales of Rs 3,392.13 crore. 

o       In view of a sudden spurt in the price of SPIcE (Sensex Prudential ICICI Exchange traded fund) – a passive open ended mutual fund listed on stock exchange  tracks the BSE sensex- in the last one month and particularly, last one week, the BSE has cautioned the investors and has asked the trading member to make their clients aware about the features of the SPIcE befor placing orders. The price has increased from Rs 71.65 on April 26 to Rs 200.66 on May 26, an increase of 144.23 per cent. Also, the fund has suspended issuing fresh units of SPIcE.     

o       Securities and Exchange Board of India (SEBI) has signed a Letter of Intent (LOI) with the Securities and Futures Commission, Hong Kong (SFC) on the enhancement of regulatory co-operation between SEBI and SFC. Under the Letter of Intent, both authorities agreed to strengthen co-operation particularly in matters relating to cross-border trading and the supervision of investment products.

• Derivatives 

• With the rollover of trades from May to June contracts and contract expiration activities, F&O segment remained buoyant. The rollover activity began on a subdued note  but later on gained momentum. The daily turnover during the week under review ranged between Rs 11,630 crore and Rs 16,882 crore as compared to Rs 7,143 crore and Rs 11,358 crore in the previous week.

• Government Securities Market  

•   Primary Market

o       The RBI re-issued 8.35 per cent 2022 for a notified amount of Rs 4,000 crore at a cut-off yield of 7.28 per cent (Rs 110.30). In the auction, RBI accepted only one competitive bid for the entire notified amount reflecting aggressive bidding, apparently by LIC to corner the entire issue.

o       While the secondary market yields have eased during the week, the cut-off yield set at the 91-day treasury bill has firmed up from 5.16 per cent in the previous week to 5.20 per cent on May 25. 

•   Secondary Market

o       With the redemptions of loans, the inflows into the system increased. The average deployment under RBI’s LAF increased from Rs 18,000 crore in the previous week to Rs 33,000 crore.  During the week, the call rates ranged between 4.91 per cent and 5.01 per cent; repo rates ranged between 3 per cent and 5.20 per cent; CBLO rates ranged between 4.3 per cent and 4.9 per cent . The market sentiments remained buoyant following the higher than expected price being set at the central loan auction and easing of US treasury yields. The weighted average YTM of 7.38 per cent 2015 fell from 7.04 per cent on May 20 to 6.96 per cent on May 27. 

o       The Central Board of Trustees (CBT) of the Employees’ Provident Fund Organisation (EPFO) recommended that 9.5 per cent interest rate is to be the final rate to be paid for the fiscal year 2004-05. The EPFO would use its Special Reserves Fund (SRF) to pay the interest. This is the second time that the organisation would use SRF. The final rate is one percentage point more than the interim rate of 8.5 per cent recommended by the board in August 2004.

o       Following the announcement of the annual credit policy for the year 2005-06, wherein it was proposed that participation in market repo facility in Government Securities by non – scheduled Urban Co-operative Banks and listed companies having gilt accounts with scheduled commercial banks may be allowed subject to eligibility criteria and safeguards. The RBI has permitted participation in repo market, both repos and reverse repos, to the following entities having gilt account with an SGL Account.

a.       Any non-scheduled Urban Co-operative bank; and

b.      Any listed company, having a gilt account with a scheduled commercial bank.

o       In addition, the following conditions are applicable for repo transactions by the listed companies:

a.      The minimum period for reverse repo (lending of funds) by listed companies is seven days. However, listed companies can borrow funds through repo for shorter periods including overnight  

b.      Where the listed company is a ‘buyer’ of securities in the first leg of the repo contract (i.e. lender of funds), the custodian through which the repo transaction is settled should block these securities in the gilt account and ensure that these securities are not further sold or re-repoed during the repo period but are held for delivery under the second leg; and

c.       The counterparty to the listed companies for repo/reverse repo transactions should be either a bank or a Primary Dealer maintaining SGL Account with the Reserve Bank.

• Bond Market  

o       The RBI has banned the use of non-rupee pricing benchmarks MIFOR (Mumbai Interbank forward offered Rate) in local interest rate swaps. This move  appears to be aimed at curbing currency and rate speculation. MIFOR is a benchmark rate widely used by companies to structure swaps that hedge currency and interest rate risk on their offshore debt.

o       During the week, an aggregate amount of Rs 2,100 crore was mobilised through four issues ,of which two are by National Housing Bank (NHB) and the other two are by HDFC and Indian Oil Corporation each. The highest amount has been mobilised by IOC, of Rs 500 crore plus Rs 500 crore as green shoe option.  

• Foreign Exchange Market  

o       The dollar hovered near seven month high against the euro, as strong US economic data was being put out and expectations that France would reject a vote on EU constitution. As a result, the rupee weakened against the dollar and the rupee-dollar exchange rate depreciated from Rs 43.46 to 43.54. However, the rupees fall has been limited due to the expectations of dollar inflows amounting to $1 billion by way of Infosys’ ADR issue.

o       The six-month forward premia fell from 1.44 per cent on May 20 to 1.28 per cent on May 27 probably due to phasing out of MIFOR.

COMMODITIES FUTURES

o       The NCDEXAGRI index rose over the week from 1218.34 on May 21 to 1223.60 on May 28. On May 27, the index reached a peak of 1227.92. 

PUBLIC FINANCE

• According to data released by the finance minister, the tax-GDP ratio is expected to go up to 10.61 per cent in fiscal year 2005-06 up from 9.82 per cent in 2004-05. The finance minister further stated that India Inc. contributed to 85.3 per cent of the Centre’s tax collection by way of corporation tax, excise, customs and service tax, while individual taxpayers contributed to 16.7 per cent in 2004-05. The Centre has collected indirect tax arrears worth Rs 2,642 crore in 2004-05 as against Rs 711 crore in fiscal year 2003-04. Direct tax arrears collection stood at Rs 7,083 crore in 2004-05 over Rs 5,540 crore in fiscal year 2003-04. The direct tax to GDP ratio has improved to 4.82 per cent during fiscal year 2004-05 as against 3.81 per cent in 2003-04. It is estimated to be at 5.09 per cent in 2005-06. However, the indirect tax to GDP ratio at 5.50 per cent has not seen much of an improvement in fiscal year 2004-05, when compared to a ratio of 5.34 per cent in financial year 2003-04.

• The Cabinet Committee on Economic Affairs has approved the sale of 10 per cent stake in Bharat Heavy Electricals Ltd (Bhel) through a public offer. At present the government holds 67.72 per cent equity with Bhel, with the remaining 32.29 per cent being held by public banks and foreign institutional investors. The proceeds from the sale will be transferred to the National Investment Fund.

• As per new norms finalised by the revenue department for assessment in the 2005-06, companies that paid the minimum alternate tax (MAT) after earning book profits of more than Rs 50 lakhs during 2004-05 may come under tax scrutiny. Under the new norms as many as 111 companies will come under scrutiny. The move has been aimed at bringing more companies under the coverage of tax scrutiny. Refunds and claims of more than Rs 10 lakh made by non-corporates and Rs 50 lakh in the case of corporates will also come under scrutiny. The scrutiny norms will also cover international transactions exceeding Rs 5 crore.

• The Cabinet has approved amendments in the Income Tax Act to exempt income of residents and non-residents arising out of any international sporting event conducted in the country. This decision has been taken in response to the request submitted by the International Cricket Council (ICC) and the Board of Cricket Control of India (BCCI) to enable hosting of the Champions Trophy in the country in 2006.

INFLATION

o       The annual rate of inflation based on wholesale price index (WPI) on a point-to-point basis stood at 5.55 per cent (provisional) for the week ended May 14, 2005. This was relatively higher than the annual inflation rate of 4.96 per cent in the corresponding period of the previous year.

o       WPI for ‘All commodities’ (Base: 1993-94= 100) for the week ended May 14, 2005 stood at 192.1 (provisional), up by 0.1 per cent from 192.0 (provisional) for the previous week. The index of ‘Primary articles’ (weight 22.07) rose by 0.3 per cent too 188.9 from 188.4 for the previous week. Within this group the index for ‘Food Articles’ group rose by 0.4 per cent to 190.9 from 190.2 for the previous week. The rise in the index has been mainly due to an increase in prices of food items like beef and buffalo meat, poultry chicken, masur, and eggs. Prices of tea and ragi have, however, declined. The index for non-food articles group rose by 0.1 per cent from 179.2 in the previous week to 179.3, mainly due to higher prices of raw silk, sunflower and safflower. On the other hand the prices of fodder, linseed and soyabean have declined. The index for ‘Minerals’ group has risen by 1.3 per cent to 249.1 from 246.0 for the previous week.

o       The index for Fuel, Power, Light and Lubricants with a weight of 14.23 per cent rose to 293.3 from 293.2.

o       The index for ‘Manufactured products’ group with a weight of 63.75 per cent remained unchanged at its previous week’s level of 170.6.

o       The final index for the week ended March 19, 2005 for ‘All commodities’ (Base: 1993 94= 100) stood at 189.7 as against 189.1 (provisional). Subsequently the annual rate of inflation based on the final index has been calculated at 5.45 per cent as against 5.11 per cent (provisional).

LABOUR

• The Employees Provident Fund Organisation (EPFO) has recommended an interest payout of 9.5 per cent for 2004-05 to its over four crore subscribers. The recommendation has come about in spite of the fact that returns on investments allow the fund to declare 8.5 per cent deficit –less interest rate. The fund will have to dip into special reserve fund  (SRF) to meet the deficit. The trustees manage the SRF, as it is not provided for in the EFP Act. After meeting the deficit of Rs 716 crore or so the SRF will be left with a shoestring amount of Rs 106 crore or so. It remains to be seen if the Labour ministry will take up the tab with the finance ministry to make good the shortfall. The payout to four crore EFP subscribers at 9.5 interest rate would entail an extra burden of Rs 927 crore.

o       Three Southern states-Kerala, Tamil Nadu and Andhra Pradesh- accounted for 56 per cent of 23.9 lakh workers that left the Indian shores in search of livelihood abroad during 1998-04.   

EXTERNAL SECTOR

• Oil companies earnings have shot up by 75 per cent in one year alone on the back of exports of fuel and oil products, which have turned out to be more lucrative than selling these products in the domestic market. Fuels is one of the top five commodities exported, in India ’s export basket. Exports of petro-fuels crossed Rs 25000 crore in 2004-05, which is 75 per cent over the previous fiscal year. Deterred by low earnings in domestic sales, oil companies are exporting petrol, diesel and aviation turbine fuel (ATF) to far and distant markets. The new export markets include the US , South America, Europe and West Asia . Unrealistic price policy in the domestic market is the biggest driving force behind the increased exports.

• The crude oil import bill has risen by 40 per cent during 2004-05; from Rs 83528 crore in 2003-04 to Rs 1,17,032 crore in 2004-05. This rise has been mainly on account of high international oil prices. Also, the import of crude oil rose from 90.4 million tonnes during 2003-04 to 95.9 million tonnes during 2004-05.

• The Navi Mumbai special economic zone (SEZ), which integrates the Navi Mumbai SEZ and Maha-Mumbai SEZ projects, has achieved financial closure. IDBI sanctioned Rs 486 crore for the project on the 24^th of May and the construction work is set to begin on July 10.

o       The department of industrial policy and promotion (DIPP) has proposed raising the foreign investment limit for all mining sectors to 100 per cent. As per the proposal sent to various ministries, the FDI cap for mining of diamonds and precious stones is likely to be raised from 74 per cent to 100 per cent. The norms for mining of coal and lignite are also proposed to be relaxed. For captive mining of the two fuels, the cap is proposed to be raised from 74 per cent to 100 per cent.

CREDIT RATINGS

• Fitch Ratings has assigned a rating of AA+( ind )/Stable to the Rs.25 crore non-convertible debenture programme of Mahindra and Mahindra Financial Services Ltd. (MMFSL). The rating reflects continued equity support from its parent Mahindra and Mahindra (M&M), that holds 97 per cent of the equity capital of MMFSL

• Crisil has reinstated the rating on Instrumentation Limited Rs 35 crore non-convertible bonds (Series B) to AAA (SO) from D (SO) following the payment of the interest, due to the investors. Meanwhile, it has also reaffirmed the rating on the Bond (Series A) at AAA (SO). The ratings are based on the strength of a guarantee provided by the Government of India and on a credit enhancement mechanism put in place to ensure timely payment to investors.

• In another exercise, the agency has assigned Grade-4 to the two courses offered by Sailors Maritime Academy (SMA), Vizag. The two courses are a three and half month Pre-sea Deck Cadet and one year B. Sc. (Nautical Sciences) courses. The grading indicates that the quality of education imparted by the graded courses at the institute with respect to course objectives as stated by the Director General of Shipping (DGS), is outstanding. The assigned grade underpins SMA's tie up with Indira Gandhi National Open University, for managing curriculum and examination. Similarly, it has also assigned Grade-1 to BS (Marine Engineering) and BS (Nautical Technology) courses offered by the Tolani Maritime Institute (TMI). The assigned grade reflects TMI’s tie-up with Birla Institute of Technology and Science, excellent placement track record, qualified and experienced faculty, good infrastructure, good financial flexibility and professional and committed promoters.

• Icra has reaffirmed the A1+ rating assigned to the Rs. 75 crore commercial paper programme of HCL Infosystems Limited (HCL). The reaffirmation of the rating reflects HCL’s increasing market share in a growing domestic personal computer

• (PC) and networking market as well as and the company’s strong liquidity position as  reflected  in its low gearing, substantial liquid investments and un-utilised bank limits.

• Icra has withdrawn the outstanding LA+ rating, assigned to the long term non-convertible debenture programme of Jindal Steel and Power Limited, as the company has prepaid the rated instrument.

• Care has downgraded the rating assigned to Mysore Sugar Company’s Rs. 14.84 crore NCD issue from BB (SO) with credit watch to C (SO) with credit watch. The downgrade in rating takes into account non-availability of requisite funds in the designated account, non-invocation of guarantee by the trustees as per the SPM and the consequent impact on servicing of interest liabilities.

Theme of the week:

Industrial Entrepreneur Memorandum (IEM) and Employment Generation in Post-reform Period 

Objective of the study:

The objective of this note is to present a picture of the possible levels of non-farm investment and employment as proposed by medium and large-scale business in the post-reform period, through what have come to be known as Industrial Entrepreneurial Memoranda (IEMs). Apart from the data on proposals made, the government has now started collecting and disseminating official data on actual investment made and employment generated by these industries. IEMs are, thus, nothing but an official source of data on investment undertaken by various medium and large-scale manufacturing units reported to the Union Ministry of Industry. This study aims at examining the extent of employment generated through IEMs implemented in post-reform period in India .

The note comprises of four sections as follows:

I.                           The first section provides a background, that throws light on the evolution of Industrial policy in India and incidentally, also takes a brief account of the trends in orgainised sector employment at all- India level. 

II.                        The second section presents a status report on the proposed IEMs and their employment potential with three sets of details, namely, aggregate, state-wise and industry-wise.

III.                      The third section sets out the corresponding details of actual IEMs implemented and employment generated at the aggregate level as well as state-wise.(Industry-wise disaggregation on IEMs implemeted and employment generated are not available.)

IV.                     Finally, an attempt is made to provide an assessment of the available data.

                                                                        I. 

The Background

Immediately after Independence , the Government of India introduced the Industrial Policy Resolution in 1948. This resolution outlined the approach to industrial growth and development. It emphasised the importance of enhancing industrial production and ensuring its equitable distribution. After the adoption of the Constitution and the socio-economic goals set out therein, the Industrial Policy was comprehensively revised and adopted afresh in 1956. The New Industrial Policy Resolution of 1956 gave primacy to the role of the state to assume a predominant and direct responsibility for industrial development, on the ground of scarce capital and weak entrepreneurial base that may afflict the economy.  

Subsequently, the government has modified the policy through statements in 1973, 1977 and 1980 to meet new challenges that arose from time to time. The Industrial Policy Statement of 1973 identified high-priority industries in which investment would be permitted from large industrial houses and foreign companies.  This was followed by the Industrial Policy Statement of 1977, that laid emphasis on de-centralisation and the role of small-scale, tiny and cottage industries. The Industrial Policy Statement of 1980 focused attention on the need to promote competition in the domestic market, technological upgradation and modernisation. This policy laid the foundation for an increasingly competitive export-based industrial structure and for encouraging foreign investment in high-technology areas.

As part of the process of de-control, the New Industrial Policy of 1991, made several structural modifications to boost industrial growth at a rapid pace. One of the significant changes was the abolition of industrial licensing, except for a few industries such as manufacturing, electronic, aerospace and defense equipment. Industrial licensing is thus virtually abolished for all projects except for a short list of industries related to security and strategic concerns, social reasons, hazardous chemicals and overriding environmental issues. The process of industrial de-licencing was expected to give big push to new investments by providing freedom to entrepreneurs in setting up industries and by encouraging entrepreneurship; in turn, it was expected to achieve greater employment generation. Thus, industries which intend to begin new projects and substantial expansions in the existing projects are exempted from licensing and are only required to file information in the prescribed Industrial Entrepreneurs Memorandum (IEM) with the Secretariat for Industrial Assistance (SIA), Ministry of Industry, Government of India.

Reduction in Organised Sector Employment

In spite of various efforts undertaken including industrial policy changes, employment growth has remained passive. A much talked about  ‘jobless growth’, wherein higher GDP growth in post-reform years has not been accompanied by employment growth, is quite evident in India .  Piercing through the Hindu rate of growth of 3.5 per cent and attaining an overall economic growth was at 5.4 per cent per year during the decade 1983-94, creation of new jobs was accelerated to the average annual rate of 2.7 per cent during the same period. Contrariwise, while the annual average growth rate of the economy significantly increased to 6.6 per cent during 1994-2000, the rate at which the jobs were created slumped to just 1.1 per cent per annum.

Worse still, the actual employment has been declining in the organized sector.Employment in the public sector has declined by 5 per cent between 1997 and 2003, while in the private sector it has declined by 3 per cent. On the whole, the total estimated employment in the organized sector during these six years has registered an absolute decline of  4.4 per cent. (Table 1)

However, such a decline is not surprising. While a large number of companies, both in public and private sectors, have reduced their workforce in post-reform years and adopted more capital-intensive techniques of production, new projects that have come up during this period have not created enough jobs to compensate for this loss.

II.

Proposed Industrial Investments and Employment Potential as Revealed by IEMs

(a) At Aggregate Level:

Table 2 shows how, after considerable sluggishness in the pace of new investment proposals upto 2002, there has been a sudden surge in investment proposals in 2003 and 2004. Some of them appear to be of very high size with much higher per unit employment potentials. The impetus for such a pick-up in implementing investment projects has come from a relative exhaustion of installed capacities created during the earlier boom phase of 1994-95 and 1995-96. When excess capacities existed for some years up to 2001-02, no fresh investment was proposed by the industry.

(b) State-wise Proposals of IEMs and Proposed Employment

State-wise distribution of IEMs, their proposed investments and employment potential, do portray a situation of considerable regional concentration of proposed industrial investment activities after economic reforms began in 1991. Two top-ranking and competing states in this respect are in the western region, the states of Maharashtra and Gujarat (Table 3). These two states together have nearly one-third of the country’s proposed investment and about 27 per cent of implied employment potential. However, between the two states, there is some qualitative difference. Projects in Maharashtra  appear to be relatively more labour-intensive than those in Gujarat . This is evident from the fact that for Gujarat, while its share of proposed investment at the all-India level stands at 15.4 per cent, its share in total employment potential works out to only 10.4 per cent; on the other hand, the respective shares in respect of Maharashtra were close to each other, both at the top figures of 17.1 per cent and 16.8 per cent, respectively. The next two states in importance in terms of the number of projects and amounts of investment proposals, are in the south, namely, Andhra Pradesh and Tamil Nadu. But interestingly it is the state of Uttar Pradesh which has overtaken all states, even the otherwise top states of Maharashtra and Gujarat , in terms of relative employment potential of the proposed investment projects.  While UP has a share of 8.6 per cent in terms of number of projects and 6.0 per cent in terms of the amount of investment proposed, its share in employment potential is as high as 20 per cent (Table 3).

(c) Industry-wise Distribution of IEMs and Proposed Employment:

Metallurgical industries, chemicals, fuels, textiles and electrical equipment have been top industries that attract high proportions of IEMs and their associated investments. These five industries have accounted for about 69 per cent of the total investment proposals (Table 4). Of these, if ‘fuels’ are secluded as they have practically miniscule share in employment potential, the remaining four industries account for relatively high employment share at 52 per cent.

Of the above five major industries, ‘textiles’ is the most labour intensive with about 9 per cent of the total investment accounting for over 15 per cent of employment potential. The other  labour-intensive industry is ‘food processing industry’, which has 2.5 per cent share in proposed investment, but 7.6 per cent share in employment potential.

III

Implementation of IEMs and Reported Employment Generation

Of late the government has begun to publish data on the actual implementation of IEMs. These data provide some interesting revelations. 

(a)    Aggregate level:

Broadly, it has been found that investment data on IEMs exhibit an oscillating picture in the post-liberalisation period especially after 1997 in terms of the amount of investment made (Table 5). 

The fluctuations have taken place both in the number of IEMs implemented and the amount of investment effected. Since 1993, the number of IEMs implemented has alternated between a rise and a fall each year. The same trend is found in the amount of investment. However, in some years contrary trends are noticed. For instance, in 1999, in spite of a reduction in the number of IEMs, the actual amount of investment had gone up sharply. In contrast to this, in the year 2000 the total amount of investment dropped to a considerable extent as against some increase in the number of IEMs. In 2001, there was a sharp improvement in the implementation of IEMs. But this was followed by two years of steep decline in both, the number of IEMs implemented and the amount of investment involved in them. While the number of IEMs implemented was 626 in 2001, it fell to 236 in 2003. Likewise, the amount of investment slumped from

 Rs. 15,254 crore to Rs.2,676 crore during the same period. Compared with these declines, the improvements effected in 2004 both in the number and amount was fractional.    

As for employment generated in the projects implemented, the annual figures are not available. Overall, since the beginning of the reform period, 946,807 additional jobs have been created through the implementation of 5,750 IEMs during the 13-year period from 1991 to 2004. The average number of jobs works out to 165 per IEM. The average capital employed works out to Rs. 20.2 lakh per additional worker, which shows a moderate size of capital intensity.  

(b) State-wise IEMs Implemented and Employment Generated:

            The state-wise analysis of actual investment and job creation reveals the persistence of the acute concentration amongst a few states – almost similar to the picture that emerges from the IEMs filed. While the regional imbalances have persisted in India over the last half a century of planned economic development, they seem to have further widened significantly in the post-reform period, if the implementation of these IEMs is any indication. As the role of the public sector diminishes, subsequent to the virtual dismantling of industrial licensing and removal of locational constraints, private investments have been mostly flowing to states and regions with relatively better infrastructure and other facilities (Table 6).