Current Economic Statistics and Review For the Week 
Ended June 4, 2005 (23^rd Weekly Report of 2005)

  I

Highlights of  Current Economic Scene

CORPORATE SECTOR

• The J.J. Irani Committee on Company Law presented its report to the Government on May 31, 2005. The report has suggested a number of changes to the Companies Act, 1956. Its major recommendations are:

• No mandatory rotation of auditors.

• Presentation of cash flow statement should be made mandatory across the Board.

• Easy conversion from liquidation to turnaround and vice versa.

• Minimum of one third of the total number of Directors should be Independent Directors (ID).

• Public interest/ Government claims should not get precedence over private rights.

• The private sector has turned down the Prime Minister’s proposed SC/ST reservations in the private sector. Big business conglomerates feared that it could be detrimental to the unity of the country. The corporate sector intends to conduct in-house vocational training workshops in partnership with IITs and vendor development programmes with a view to empower socially and economically backward workers.

• The fourth quarter has seen a turnaround in the businesses of many small and mid cap firms. Companies with a sales turnover of Rs. 25 crore and Rs. 100 crore have outperformed the companies with sales turnover of more than Rs. 500 crore. The latter companies posted a net profit growth of 35 per cent y-o-y, while the former companies posted a net profit growth of 59 per cent. The housing construction sector was the star performer with a whopping 938 per cent growth in net profit on y-o-y basis. The sponge and pig iron sector registered the highest sales growth at 87.5 per cent y-o-y.

• Policy Issues:

• The Government would allow foreign institutional investors (FIIs) to invest not more than 26 per cent in Indian newspaper companies. Foreign companies, desirous of bringing out their international editions in India , would be allowed to set up fully owned subsidiaries. However, this would require the permission of the Foreign Investment Promotion Board.

• The Orissa Government has imposed a cess, ranging from 5-20 per cent on different minerals. It aims to attract investments in infrastructure and peripheral development of the mining areas. The rates would be revised every two years.

• The Union Law Ministry has approved the proposal from the Ruia Group to buy back the residual stake of Bharat Bhari Udyog Nigam in Jessop. With this, the Government has completely divested its stake in Jessop

• New Ventures:

• The tile manufacturing company, H&R Johnson ( India ) is planning to set up a new manufacturing unit in Rajasthan that will commence operation by 2006. The availability of key raw materials and proposed gas pipeline were factors taken into consideration for setting up a greenfield unit in Rajasthan.

• Nokia will set up a high-end base station controller in Chennai. The production of base station controller is expected to begin simultaneously with that of terminal production i.e. in the first half of 2005-06.

• Mergers & Acquisitions

• HCL Technologies announced a joint venture (JV) with NEC Systems Technologies -a Japanese infotech major. This venture will provide offshore software engineering solutions and will be located in Noida, Uttar Pradesh. The JV is expected to grow to about US$ 25 million in three years and it will be operational from October 2005.

• Matrix Laboratories and Strides Arcolab have merged into a single entity namely, ‘Matrix Strides Limited’. This move will result in lower production costs, strengthen the company’s overseas presence and its position as a supplier of anti-retroviral Aids drugs.

• New Ventures:

• Infosys Technologies successfully completed its secondary ADR listing. This is the first ever Public Offer Without Listing (POWL) in Japan by an Indian company.  Normura acted as the sole book runner for the Japan tranche of the ADR offering.

• Indian Inc. raised US$ 544 million through external commercial borrowings (ECBs) in April 2005. United Spirits was in the forefront as it raised US$ 70 million for five years and three months to finance projects.

• Ranbaxy Laboratories received a tentative approval from USFDA for manufacturing and marketing Lamivudine tablets, used for HIV treatment.

• The Khemkas owned Sun Group is picking up a 41 per cent stake in Hindustan Petroleum Corporation promoted Prize Petroleum.

o    Consumer durables and auto companies are refusing to pass on the benefits of lower aluminium and steel prices to the consumers. These raw materials account for around 60 per cent of total raw material costs in consumer durables and automobiles.

• MIDC has authorized Reliance Energy to set up 100 MW group captive power plants in the industrial estates of Thane-Belapur and Butibori-Hingna to smoothen erratic and poor quality power supply. Consumers would hold 26 per cent equity while Reliance Energy would hold the balance.

• Warburg Pincus International picked up around 2 per cent equity in Kotak Mahindra Bank for Rs. 90.5 crore. The total foreign holding in Kotak Mahindra Bank stood at 23.4 per cent as on March 31, 2005.

• Larsen & Turbo (L&T) bagged a road contract worth Rs. 278 crore from the National Highway Authority of India. It involves upgrading and four-laning of a 70 km section of NH 76 in Rajasthan.

• Infosys Technologies and Alstom SA are set to invest US$ 39 million over the next three years in a Research and Development (R&D) center inside the Infosys campus in Bangalore . This center will focus on high-end engineering services.

• Harig Crankshaft won a Rs. 150 crore order from Tata Motors, which is to be executed in next one year. To execute this order, Harig Crankshaft will raise Rs. 50 crore.

• GAIL has increased its natural gas prices. This move may increase the operational cost of companies. As GAIL does not produce or market kerosene, the Government has agreed to keep it out of the kerosene subsidy burden.

• Company results:

• Tata Chemicals registered a growth of 38.9 per cent in net profit, from Rs. 326.1 crore in 2003-04 to Rs. 452.94 crore in 2004-05. Net sales were recorded to the tune of Rs. 3,008.14 crore in 2004-05. Among segments, fertilizers generated maximum growth of 20.7 per cent, from Rs. 1,551.8 crore in 2003-04 to Rs. 1,872.8 crore in 2004-05.

o    Mahindra and Mahindra’s net sales grew by 34 percent from Rs. 4,970.7 crore in 2003-04 to Rs. 6,660.5 crore in 2004-05. The highest sales growth of 55.5 per cent came from the farm equipment segment. It netted in a sale of Rs. 2,029.8 crore in 2004-05.

o    Indian Oil Corporation’s net profit reduced by 43.2 per cent to Rs. 4,891.3 crore in 2004-05 from Rs. 7,004.8 crore in 2003-04. The huge subsidy burden as well as the high international crude prices took a toll on the company’s financial performance.

• Colgate Palmolive (India)’s net sales grew by a modest 2.6 per cent, from Rs. 939.2 crore in 2003-04 to Rs. 964.2 crore in 2004-05. Its advertising cost came down by 7.3 per cent from Rs. 147.7 crore in 2003-04 to Rs. 136.8 crore in 2004-05.

• TVS Motor Company’s net profit remained more or less flat at Rs. 137.5 crore in 2004-05 over Rs. 138.4 crore in 2003-04. Net sales increased fractionally by 2 per cent from Rs. 2,820.2 crore in 2003-04 to Rs. 2,875.9 crore in 2004-05.

• Net sales of Sesa Goa zoomed by 132.2 per cent, from Rs. 650 crore in 2003-04 to Rs. 1,509.4 crore in 2004-05. Iron ore segment generated maximum sales of Rs. 1,036.5 crore in 2004-05.

• Hindustan Zinc registered a growth of 61.7 per cent in its net profit from Rs. 405 crore in 2003-04 to Rs. 655 crore in 2004-05. Net turnover was in the tune of Rs. 2,187 crore in 2004-05.

o       Sterlite Industries registered a net turnover of Rs. 3,991.7 crore in 2004-05 from Rs. 3,067.7 crore in 2003-04, a growth of 30.1 per cent. Phosphoric acid and paper recorded the highest sales, up by 79.3 percent y-o-y, from Rs. 174.8 crore in 2003-04 to Rs. 313.6 crore in 2004-05.

BANKING HIGHLIGHTS

• Indian Overseas Bank (IOB) has tied up with Clearing Corporation of India (CIIL), to offer continuous linked settlement to process/settle its forex trade payments. IOB is the first Indian bank to provide this service.

• Tamilnad Mercantile Bank has posted a net profit of Rs.82.4 crore in 2004-05, up from Rs.80.7 crore in the previous year.

• Standard Chartered Bank has created a virtual SME (small and medium enterprises) bank by combining wholesale as well as consumer banking services at a single point. Be it term loans, pre-shipment or post-shipment credit, currency risk hedging or personal loans, housing loans or car loans – everything is provided as a one stop financial services to SME customers. Stanchart is among the clutch of banks reaping the benefits of packaging universal banking services for SMEs. Its SME exposure doubled in 2004-05 and growth in the segment has been galloping, of late.

• The RBI has cancelled the certificate of registration granted to Mumbai-based, Alpic Finance and Pune-based KFIC Financial Services for carrying on the business of a non-banking financial company. They have also been prohibited from acceptance of deposits and alienation of assets.

INFORMATION TECHNOLOGY

o       HCL Technologies (HCL) has announced a joint venture with Japanese infotech major NEC to provide offshore software engineering solutions. NEC Systems Technologies Ltd. will hold a 51 per cent stake in the company, with the remaining shares held by HCL. The joint venture will cater to all NEC companies and its clients. As per the joint venture agreement, the key areas of co-operation will be in the fields of embedded software, hardware design, network and security, R&D, high-performance computing and mobile technology.

TELCOM

• Sify has slashed call rates up to 23 per cent for calls to Bahrain , Oman , Iran and Saudi Arabia . Sify was the first company in India to launch high quality net telephony in India with the prime objective of making international calls affordable for users. Furthermore, call rates to Nigeria , Bangladesh and Kenya have also been slashed.

• The government has suspended the international long distance (ISD) licence of Data Access for non-payment of over Rs.200 crore due to department of telecom and other operators like BSNL and MTNL.

INSURANCE

• Six out of the eight private insurance companies have posted net profit within the first four years of their operation. Bajaj Alliance General Insurance, ICICI Lombard General, Tata AIG General, Iffico-Tokio General, Royal Sundaram Alliance and Reliance General are the six profit-making companies. Globally, general

  Private general insurance companies Net profit and Return on Equity in 2004-05
  Private general insurance companies	Net Profit (Rs. Crore)	RoE (%)
  Bajaj Allianz	47.0	42.7
  ICICI Lombard	48.4	21.9
  Tata AIG	15.0	12.0
  Iffco-Tokio	14.7	13.4
  Royal Sundaram	5.4	4.2

   insurance company usually takes five to six years to break even, but privatisation of the Indian insurance sector has proved to be the biggest success story in the financial sector. The market share of private insurance companies has gone up to 19.63 per cent in 2004-05 from 14.21 per cent in fiscal 2003-04. A key reasons factor in the success story of private companies has been their customer-centric focus and quality service. In addition, the number of policies issued by private insurance players increased substantially, thereby enabling the companies to leverage management expenses. Bajaj Allianz’s net profit increased to Rs.47 crore in 2004-05 from Rs.32 crore in the previous year. On an equity base of Rs.110 crore, the company’s return of equity (RoE) stood as high as 42.7 per cent. Similarly, ICICI Lombard has a RoE of 21.9 per cent. High RoE reflects disciplined underwriting and lower management expenses.

FINANCIAL MARKET DEVELOPMENTS

• Capital Markets  

• Primary Market  

o       Provogue ( India ) Ltd has priced its IPO of 4.05 million shares at Rs 130 – 150, which is to open on June 10 and close on June 16. The proceeds from the issue will go towards financing expansion of the Mumbai based company’s retail stores and its garment manufacturing and design capabilities.    

o       Uniply Industries is tapping the market on June 9 with an IPO of five million equity shares of Rs 10 each at a premium of Rs 14 per share. The proceeds of the offering will be used to fund its expansion plans.

• Secondary Market  

o       The BSE sensex gained 45.28 points to end the week at 6753 compared to 6707.72 on May 27. Similarly, the NSE nifty gained 15.95 points to close the week a 2093.35. The market remained worried on account of twin blow of securities transaction tax (STT) rate hike and upfront margin system, and because of the forecasts by Center for Mathematical Modelling and Computer Simulation stating that the monsoon in June will be 34 per cent below normal. But, with FIIs turning net buyers and the expectations of an early settlement between the Ambani brothers turned the market sentiments positive.     

o       Traders refrained from taking fresh positions ahead of increased rates of STT coming into force from 1 June 2005. STT on both deliveries and non-deliveries trades was raised in the 2005-2006 budget. STT for day traders has been raised to 0.020 per cent from 0.015 per cent and on F&O trades to 0.0133 per cent from 0.01 per cent. STT on delivery based trades has been hiked to 0.20 per cent from 0.15 per cent.

o       The daily turnover in cash market on BSE fell from Rs 2,331 crore on May 27 to Rs 1,754 crore on May 31 following the implementation of upfront margin system of Sebi. 

o       During the month of May, FIIs have been net sellers in equities to the extent of Rs 1,140.10 crore with sales of Rs 15,363.50 crore and purchases of Rs 16,503.90 crore. However, during the week under review, FIIs have been net buyers.

o       Mutual funds have been net buyers of Rs 3,344.99 crore with purchases of Rs 7,000.72 crore and sales of Rs 3,655.73 crore in May.

o       Among the sectoral indices of BSE, only two indices namely BSE Metals and BSE capital goods recorded negative gains of 3.09 per cent and 0.38 per cent, respectively. Of the rest, the highest gain has been registered by BSE consumer durables index, followed by BSE FMCG. Over the week, the BSE sensex has gained 0.68 per cent, while BSE small-cap and BSE mid-cap indices have gained 3.07 per cent and 1.77 per cent, respectively.

• Derivatives

• The daily turnover during the week under review ranged between Rs 7903.2 crore and Rs 10049.3 crore as compared with a range of Rs 11,630 crore to Rs 16,882 crore in the previous week.

• Nifty futures continued to trade at heavy discount to the Nifty index, primarily due to several shares going ex-dividend in the near future. The cost of carry prevailed in the negative territory indicating a firm outlook for the market. However, monsoon worries and government’s decision on petrol prices is expected to influence the movements of the market. 

• Government Securities Market  

• Primary Market  

o       On June 6, the government re-issued 7.37 per cent 2014 and 10.25 per cent 2021 for notified amounts of Rs 6,000 crore and Rs 4,000 crore, respectively.

o       The cut-off yields set for 91-day and 182-day treasury bills auctioned on June 1 have been 5.20 per cent and 5.35 per cent, respectively.  

• Secondary Market  

o       With lower than expected inflation, the government securities market turned buoyant with yields easing across maturities. The weighted average YTM on 7.38 per cent 2015 eased marginally from 6.96 per cent on may 27 to 6.91 per cent on June 3. The call rate remained pegged to the reverse repo rate of 5 per cent due to the presence of adequate liquidity in the system. Also, the fiscal deficit at 4.1 per cent lower than the revised estimate of 4.5 per cent and the subsequent remarks by the Finance Minister indicating the government’s pursuit to curtail borrowings in its resolve to contain fiscal deficit buoyed the market. Nevertheless, the market remained subdued due to rising international oil prices. 

o       The RBI has fixed the rate of interest at 5.59 per cent floating rate bond 2009 for the half-year between June 6, 2005 and December 5, 2005.

• Bond Market

o       National Housing Bank tapped the market to mobilize Rs 350 crore through non-convertible debentures with tenures of 3 and 5 years offering yield of 1 year g-sec plus 4 bps and 20 bps, respectively. The issue is rated AAA by Crisil.

• Foreign Exchange Market  

o       The rupee-dollar exchange rate depreciated from Rs 43.52 on May 27 to Rs 43.76 on June 2, but rose to Rs 43.66 on June 3, mainly on account of dollar’s strength against the euro and yen., but, as the euro gained against the dollar on worried about the widening US trade deficit, the rupee appreciated; also, the month-end demand for dollars affected the exchange rate.  

o       The six-month annualized forward premia eased from 1.28 per cent on May 27 to 1.15 per cent on June 3.

• Commodities Futures

o       Multi Commodity Exchange (MCX), on 19.5.2005 permitted trading in Potato, Copra, Coconut oil and Coconut oil cake in July to December 2005 contracts and in Aluminium in October to December 2005 contracts and Middle East Sour Crude oil and Brent Crude oil in August to December 2005.During the period from 16.5.2005 to 31.5.2005, 50 commodities were traded at MCX, out of these, Silver, Gold and Crude oil, had the highest volumes of trade. During the same period, on NCDEX 42 commodities were traded with highest trading in guar seed, pure silver and channa.

• NCDEXAGRI index has risen from 1224.17 on May 30 to 1234.63 on June 4.

o       NCDEX Agri futures index is constructed on the prices of the nearest month expiry contracts for the same basket of commodities that forms the part of the NCDEX Agri spot index. The advantages of the futures index would be two fold. The futures index if looked in tandem with the spot index would convey to the market participants the returns the commodity markets are offering for one month period by buying the futures index. Second, since the futures index are constructed based on the futures contracts traded in the Exchange, it would get updated on real time basis as against the spot index that is updated twice a day. Also the base period for the construction is same for both i.e. the average of the prices prevailed during the year 2001 and also the base rate of 1000.

o       Since June 01 2005, NCDEX is displaying a rainfall index for Mumbai on its website. The index encompasses rainfall at both Colaba and Santa Cruz weather stations and is structured on the basis of past rainfall data. A higher index would mean, compared to the cumulative long period average rainfall up to the date of index, more rainfall. A lower index would mean otherwise. The NCDEX Rainfall Index at any point of time will tell us what percentage of cumulative normal expected rainfall (till the date of the index) it has actually rained. The value is scaled by 1000 to represent a number.

PUBLIC FINANCE

o       According to data released by the Controller General of Accounts, fiscal deficit of the country stood at 4.1 per cent of GDP lower than the revised estimate target of 4.5 per cent. The lower fiscal deficit has been mainly due to expenditure squeeze. Only Rs 1,32,160 crore has been spent during 2004-05 as against revised target of Rs 1,37,387 crore under Plan expenditure head. The government had in fact, issued a directive asking ministries to refrain from releasing more than 33 per cent in the last quarter of the fiscal year.

o       The Finance Minister, during the launch of Agriculture Insurance Company’s crop insurance scheme said that the government would try to borrow less in fiscal year 2005-06 to keep fiscal deficit in check. The government’s net borrowing target for 2005-06 is around Rs 1,10,000 crore. However, borrowings in June would be as per scheduled. The government faces a daunting task of controlling the fiscal deficit in the current fiscal year.

o       The finance ministry is expecting to raise Rs 8,000 to Rs 10,000 crore during fiscal year 2005-06 by selling a part of the government’s stake in five public sector units. Apart from Bharat Heavy Electricals Ltd (Bhel), four more PSUs –Nalco, Maruti Udyog Ltd, Power Grid Corporation and Shipping Corporation of India are to be included in the disinvestment process in the current fiscal year. The finance ministry has proposed to sell 20 per cent stake in Nalco. This has been opposed by the mines minister Sis Ram Ola, who has said, “The PSU is doing well and that there was no need to add more strength to the company.” The government intends to sell 8 per cent stake in Maruti Udyog and 15 per cent stake in Shipping Corporation. Based on current listed prices, Bhel shares can earn around Rs 2,000 crore. The sale of 20 per cent stake in Nalco can fetch Rs 1,900 crore and sale of 8 per cent stake in Maruti can give bring in Rs 1,050 crore. The sale of 15 per cent stake in Shipping Corporation should net in Rs 640 crore.

o       Many states are reducing or doing away with the central sales tax on various products to check trade diversion after reworking the VAT rates. While Arunachal Pradesh has already abolished the CST; the Delhi government is considering a proposal to reduce the CST on iron and steel to absorb the impact of the tax being halved to 2 per cent in Punjab and Rajasthan. The Empowered Committee had agreed to reduce the CST to 2 per cent from April 2006 and phase it out from April 2007.

o       The revenue department is planning to launch software (both excise and service tax) that will enable online filing of returns, scrutiny and audit, reconciliation, dispute resolution and even refunds. The revenue department has already introduced a risk management assessment system for Customs, which if found effective would be replicated.

INFLATION

• The annual rate of inflation as measured by WPI, on point-to-point basis, stood at 5.38 per cent (provisional) for the week ended May 21, 2005 over 5.55 per cent (provisional) for the previous week i.e. May 14, 2005.

o       WPI for ‘All Commodities’ (Base: 1993-94=100) for the week under review, declined marginally by 0.05 per cent to 192.0 from 192.1 observed in the previous week.

o       The index of primary articles (weight 22.02 per cent) dropped by 0.11 per cent from 188.9 for the week ended May 14, 2005 to 188.7 for the week ended May 21, 2005. This occurred predominantly because the index of ‘food articles’ group (a constituent of Primary Articles Index) declined by 0.16 per cent to 190.6 from 190.9 in the previous week, as prices of beef and buffalo meat and fish-marine were lower by 11 per cent and 2 per cent respectively in comparison to the previous week. 

• The index for fuel, power, light and lubricants declined fractionally by 0.07 per cent to 293.1 from 293.3 for the previous week due to lower prices of naphtha. Naphtha was cheaper by 2 per cent over the previous week.

• The index of manufactured products (weight 63.75 per cent) remained unchanged at its previous week’s level of 170.6. Within this group, the index of ‘rubber and plastic products’ group rose by 1.56 per cent to 136.6 from 134.5 for the previous week because of higher prices of tractor tyres and motor tyres (6 per cent each) in comparison to the previous week.

• For the week ended March 26, 2005, the final WPI for ‘All Commodities’ and the annual rate of inflation stood at 189.5 and 5.10 per cent respectively as against the provisional levels of 189.4 and 5.05 per cent respectively.

LABOUR

• PSU banks may be allowed to recruit talented middle-level management executives from other banks at an attractive pay package so as to improve their productivity. Lateral movement, which can provide better career growth prospects to middle level management, is now under active consideration of the finance ministry. The present rules allow EDs and GMs to move onto a higher posts in other banks. They do not permit GMs or even DGMs to migrate to other banks in the same capacity.

• Bank employees will receive a wage hike of Rs 450-8,000 per month with retrospective effect from November 2002. This is the outcome of the eighth bipartite wage agreement signed between banks and unions.

EXTERNAL SECTOR

• Export of cotton textiles to USA has shown a rise during January to April, 2005. Exports of combed cotton yarn increased to 4.49 million sq mtrs (MSM) during January to April 2005 as compared to a negligible level during the same period previous year.

• Indian exporters do not see much benefit in the US ban on imports from China . The US government had banned on three categories of textile imports from China .

• The government has decided to raise FDI limit in companies publishing non-news periodicals from 74 per cent to 100 per cent.

o       During 2004-05, software industry grew by 32 per cent to touch $22 billion. Software service exports registered highest growth since the slowdown in 2001, to touch $17.2 billion (34 per cent) during 2004-05. Domestic market grew by 23 per cent to touch $4.8 billion. Revenue from BPOs and IT enabled services grew 49 per cent to touch $5.8 billion.

o       The government has relaxed rules for external commercial borrowings, to allow non-banking finance companies to raise overseas loans, subject to approvals. According to finance ministry, housing finance companies with RBI approval would be allowed to issue foreign currency convertible bonds.

o       Despite a very high trade deficit, in the very first month of current fiscal year (2005-06) on account of a 51 per cent jump in imports, the government is working on a strategy for imports, which would provide a thrust to the domestic manufacturing sector.

CREDIT RATINGS

• Fitch Ratings has assigned AAA ( Ind ) (SO) rating to the pass through certificates (PTC), to be issued by a special purpose vehicle (SPV)- TVS Finance Two Wheeler Receivables Securitisation Trust May 2005- under the two wheeler loan securitisation programme of TVS Finance and Services Limited.

• In another exercise, Fitch has affirmed the tA (Ind) rating to the fixed deposit programme of Muthoot Leasing and Finance Ltd. (MLFL), which is a part of the south-based Muthoot Group. The group has diversified interests in gold loans, personal loans, leasing and hire-purchase, health care, education, real estate and hotels. The rating reflects the company’s improving but average financial profile and regional concentration of its business.

o       Icra has assigned an LAAA rating to the Rs. 3,400 crore long- term borrowing programme (2005-2006) of Indian Railway Finance Corporation Limited (IRFC). This factors in IRFC’s sovereign ownership and its strategically important role as a sole arranger of lease finance for the Ministry of Railways (MoR). The rating also takes into account the lease agreement between IRFC and MoR, which provides IRFC with a positive interest spread and protects it against liquidity, interest rate and currency risks.

o       Icra has reaffirmed the MAAA rating assigned to the Rs. 175 crore non convertible debenture programme of Citifinancial Retail Services India Ltd. (CFRSIL). The ratings primarily reflect the strength that CFRSIL derives from being a subsidiary of Citigroup Inc. in the form of management, funding and systems support. It has also reaffirmed the MAA+ rating assigned to the medium term debt programmes of Kotak Mahindra Primus Limited (KMPL), following the announcement from the Kotak group to increase its shareholding in KMPL from its current level of 60 per cent to 100 per cent.

o       The agency has also upgraded the rating assigned to the Rs. 30 crore commercial paper programme of Jindal Saw limited (JSL) from A1 to A1+. The upgrading reflects  expected improvement in profitability and cash accruals of the company on the back of its currently strong order book position as well as stabilisation of its newly commissioned Ductile Iron (DI) plant.

o       Icra has withdrawn the A1 rating assigned to the Rs. 10 crore commercial paper programme of Fortis Securities Limited at the request of the company as the company does not have any outstandings against the rated instrument.

o       Care has assigned BBB+ rating to the proposed Rs. 15 crore Tier-II subordinated bond issue of The Ratnakar Bank (RBL). The rating factors in RBL’s longstanding track record, adequate capital adequacy, and well spread out advances.

Theme of the week:

India’s Tea Exports

Happy days are far away for the Indian tea industry, which is currently witnessing a Tough time. Not very long ago, India was a major producer and exporter of tea to the world market.  For almost 5 decades, tea continued to be the major item in India ’s exports of principal commodities. Tea is indigenous to India and in particular, tea exports is a sector where the country can take a lot of pride. This is mainly because of its pre-eminence as a foreign exchange earner and its contributions to the country's GNP.

Global Demand

According to the latest statistics of global tea demand, Asia (other than west region) accounts for a major share of 57 per cent of world demand. It is followed by West Asia (13.3 per cent), East Europe (8 per cent), European Union (7 per cent), North Africa (5 per cent), America (4.5 per cent), Africa (4.1 per cent) and Oceania (0.73 per cent).

South East Asia is the home of the tea plant and the credit for introducing tea as a beverage goes to China . It is said that tea drinking is more than 4000 years old. At present, this crop is grown in more than 50 countries around the world from Georgia to Nelson (South Island) in New Zealand and from sea level to 2300 meters above mean sea level (MSL). Countries in Asia and Africa are the major tea growers and to a very small extent the crop is cultivated in Europe, South America and Australia . Among the tea producing countries of the world, China has the largest area under the crop, followed by India and Sri Lanka . India is the largest producer of tea in the world accounting for almost 30 per cent of global production.

Apart from dominance in tea production, India is also the largest consumer of tea. India is followed by China , Sri Lanka , Kenya and Indonesia in the production hierarchy of countries. In all aspects of tea production, consumption and export, India has emerged to be the world leader mainly because it accounts for 30 per cent of global production  

History of Tea in India

In 1774, the East India Company brought a consignment of tea seeds from China to India . However, tea planting in India is believed to have begun from 1824 onwards, gradually emerging into organised cultivation in northeastern parts of the country. In 1834, tea plants were dispatched to south India . Encouraging success in Assam led to commercial production of tea in south India with tea plants being introduced in Nilgiri hills (Tamil Nadu) and in Wynaad district (Kerala). Gradually progressing, Indian tea sector witnessed a phenomenal success during the second half of the 19^th century. It is perhaps the only industry where India has retained its leadership over the last 150 years. Currently, India is the largest producer of tea in the world, constituting over 27 per cent of the global tea production, followed by China 24 per cent, Kenya and Sri Lanka (each 9 per cent) and Indonesia (5 per cent).

Trends in Tea Production in India  

Post-independence era has witnessed Indian tea production making decent progress. From around 278 million kgs during 1950s, Indian tea production grew leaps and bounds to touch over 850 million kg by the 21^st century beginning. Area under tea in India , which was at 3,15,656 hectares in 1950-51 expanded to 5,07,196 hectares in 1999-2000. Furthermore, since 1950, there has been a gradual rise in the yield levels of tea, (Tables 1 and 2). Yield levels i.e. quantity of tea plucked per hectare, more than doubled from 881 kgs/hectare during the 1950s to 1972 kgs/hectare by 2000. Currently, of the total tea produced in the country, north India contributes the major junk with a share of 76 per cent; the rest 24 per cent is accounted by south India . Thus, in 2001, North India accounted for 651 million kgs of tea, while south India produced 203 million kgs. However, south Indian yield levels (at 1807 kgs/hectare) have been comparatively higher as against north  

 India 's 1629 kgs/hectare. Major tea growing states in India are Assam , West Bengal , Tamil Nadu and Kerala. Tea is also grown on a small scale in a few other states viz., Tripura, Karnataka, Himachal Pradesh, Uttaranchal , Sikkim , Bihar , Manipur, Orissa, Nagaland and Arunachal Pradesh.

An analysis of growth of tea in India reveals that of the increase in production we have achieved, two-thirds is on account of increase in productivity and one-third due to increase in plantation area.

India’s Tea Exports  

Almost every major tea-drinking nation in the world imports some or the other variety of Indian tea. Some of the premium varieties available throughout the world are inevitably Indian. Darjeeling , the champagne of Indian tea, brings out to mind the finest tea that is brewed for its flavour and aroma. While Indian orthodox tea (mostly from northern India) caters to the American and European markets, south Indian tea CTC (mostly from south India) goes to Russian Federation, Khazakistan and West Asian markets.

India has the distinction of producing both the highest and lowest quality teas: the famed Darjeeling as well as the generic CTC (cut-tear-curl), a nondescript blend used in teas.  India 's Darjeeling tea is considered the world's finest tea, and almost all of it is exported.  However, India , the world's largest tea producer, is facing rising competition in the world tea market.

Source: FAO, Mt – metric tonne

It may be pleasing to the ears that about 30 years ago, India had accounted for almost one-third of the global tea exports. While the global export market for tea has steadily grown, share of India has declined from over 50 per cent in the 1950s to a mere 15 per cent by the end of 20^th century. India , which once commanded the No.1 position in export markets, is now pushed to third place with an estimated share of 15.6 per cent of the total export market in the year 2000, way behind Sri Lanka (20.8 per cent), Kenya (19 per cent) and China (18.5 per cent).  It further declined to 11-13 per cent, much to the advantage of the new entrants namely, Sri Lanka , Kenya and Indonesia . Today, India ’s share has gradually come down to 12 per cent and what is more, it has but steadily been decreasing. The net result is that India earns fewer dollar for the tea it sells to the world today than it did a quarter of a century ago. In 1980-81, the country’s tea exports were worth $ 538 million, as in 1990-91, about $594 million but by 2002-03, the foreign exchange earnings had seen down to $ 341 million.

Top 20 Exporting Countries

Indian tea exports had claimed the largest share amongst the top 20 tea exporting countries in terms of quantity, thus commanding the number one position for almost 31 years from 1961 to 1994 except for two years during 1964 and 1965. However, this share has drastically fallen from 36.3 per cent in 1961 to about 13.7 per cent in 2003 (Table 4). Amidst competitive conditions, Kenya climbed to the number one position with 23 per cent share. As at the end of 2003, China ranked as the second largest exporter with 20.4 per cent share, while India slided to third position amongst the top 20 tea exporting countries in the world. Kenya has remained the largest tea exporter in 2003 with 21 per cent share of the market.

Mozambique

Despite India 's historical success in the tea industry, in recent years, Indian tea is facing stiff competition in the international market. India is the only major tea exporter that has registered a decline in export volumes in recent years. Exports from other three big countries – Sri Lanka , China and Kenya – have gone up by 25 per cent since 1997, while India has seen its exports dwindle by 20 per cent over the same period. Rising competition from African countries as Kenya , also threatens India where production in teas is new and expanding. According to Tea Board, India ’s earlier dependence on Russia ’s imports was one of the main reasons for the drop of its global tea exports. Russian preference has been changing from CTC, India ’s strength, to orthodox tea. The FAO report bears this out. India ’s exports to Russia dropped by 4 million tonnes in a single year from 47 million tonnes in 2002 to 43 million tonnes in 2003. At the same time, the Russian Federation ’s total tea imports have increased.

The country-wise performance of tea export has been diverse. Indian exporters continued to loose volume in Commonwealth of Independent States (CIS), Europe, the US and some Middle-East countries. Moreover, big buyers like Russia , Iran and Iraq have become inactive due to political reasons. In the CIS countries, Indian tea exports were down by 10.7 million kgs (mkgs) and ended at 48.51 mkgs. All the same, it succeeded in regaining a part of its share in the Iraqi market where it rose from 13.36 mkgs to 24.73 mkgs in 2004. Similarly, in the UK , it suffered a setback by 2.13 mkgs and ended at 17.77 mkgs. Similar losses were registered in the Netherlands , Germany and Poland . The exporters somehow managed to retain their trade volumes in the Japanese market. Nominal growth has been registered in UAE and Iran . However, it dropped in Afghanistan and Pakistan markets. On the other hand, tea exports to Kenya registered almost three-fold growth, from 3.49 mkgs in 2003, to 9.99 mkg in 2004. The average price earned from the Kenyan market also increased to Rs 46.88 per kg from 40.26 per kg in the previous year. 

To an extent, tea export would have been much higher in 2004 but for the damage suffered by the crop in April and again in December last year. Tea production in south India continued its downtrend for the fourth continuous year, dropping by 7.7 mkgs in 2004 mainly on account of the severe drought in April. From a total of 193.45 mkgs in 2003, production fell to 185.73 mkgs. The decline in output began in 2001. Kerala registered the biggest drop of over 6.9 mkgs with production failing to reach 49.68 mkgs from 56.62 mkgs in 2003. Tamil Nadu, which realised an output of 131.71 mkgs in 2003, produced only 130.72 mkgs in 2004. However, Karnataka is the only state in south India that has seen its output rise to 5.34 mkgs in 2004 from 5.1 mkgs in the preceding year. This was followed by frost attack in parts of south India . With temperatures between  -1 centigrade and  +2 centigrade in Nilagiris in Tamil Nadu and high ranges of Kerala, tea leaves in vast stretches were frozen . The Tea Research Centre in Munnar estimates that after a week of frost about 1.5 million kgs tea has been lost.

At the same time, exports from North India declined by 3.8 mkgs to 88.4 mkgs. Exports from south India in 2004 went up by 13.5 mkgs to 95 mkgs from 81.5 mkgs in 2003. As a result, the total exports from the country rose by 9.9 mkgs to 183.6 mkgs valued at Rs. 1,673.5 crore from 173.7 mkgs worth Rs 1,590.2 crore in the previous year. However, the average price of Indian tea continued to hover around Rs 91.13 per kg.

Domestic consumption

Since 1970 India has become the largest absolute consumer of tea. During 1971-73 it had accounted for 22 per cent of total world consumption. Indian tea consumption during 2000 was at around 650 million kgs, of which 245 million kg reached the consumers in the form of packet tea and the rest 408 million kgs in loose form. The domestic consumption figures have grown from 415 million kgs in 1986 to 653 million kgs in 2000. In terms of growth rate (CAGR) during the 15-year period, tea consumption grew at 2.89 per cent, with packet tea growing at an impressive around 6 per cent and loose tea at 1.6 per cent.

Annual per capita consumption of tea in the country currently stands at around 670 grams. It is said that even 200 grams rise in the annual per capita consumption would create a huge supply demand gap, leaving no tea for exports. Anything beyond this level, the country may have to import (assuming production at the current level). This implies that a slight boost in the per capita consumption of tea within the domestic market alone should suffice for a prop up in tea prices, which are witnessing a down swing since the past two years. Here it is interesting to note that the per capita consumption of some of the major producing and importing nations namely, Pakistan (0.78 kgs), Sri Lanka (1.2 kgs), Egypt (1.03 kgs), UK (2.46 kgs) and Ireland (2.78 kgs) has been much higher than that in India . Tea consumption in certain populous states like Bihar , Orissa, UP is abysmally low. It is the same with the southern states of Karnataka, Tamil Nadu, Andhra Pradesh and Kerala, since coffee is preferred as a substitute for tea. Rural Indian populace, which accounts for nearly 70 per cent of the total population, consumes relatively less tea than that consumed by the remaining 30 per cent of the urban population. According to an estimate made in 1999, tea consumption by rural and urban Indian markets has been in the ratio of 60:40, that is it stood at 408 and 285 million kg respectively.

The essential difference between the other tea producing countries and India is the fact that Sri Lanka exports around 85-90 per cent of its tea production, and Kenya exports 80 per cent of its tea production. As a matter of fact, all the tea producing countries export more than 75 per cent of their production whereas India exports hardly one-third of its tea production. It is this large domestic absorption base which affects our exports. Our priority has always been the domestic consumer in view of the fact that tea is a popular beverage consumed all over the country.

Cost of Tea Production

The labour-intensive tea industry directly employs over 1.1 million workers and generates income for another 10 million people approximately. Women constitute 50 per cent of the workforce. However, plantation companies in India cite 'labour' as the greatest problem. The cost of producing tea in India is the highest in the world. This has been known for years. An inter-ministerial committee on the plantation sector had pointed out a couple of years ago that the welfare cost of tea per kg produced was as high as Rs.3.96 and Rs.7.17 in south and north India , respectively. To be fair, it’s not just the Plantations Act that is responsible for the rise in costs; the committee pointed out that the higher cost in north India is primarily on account of non-statutory but customary commitments on food and fuel, which is as high as Rs.4.28/kg.

According to an estimate, cost of production of tea in India has increased by 38 per cent by 2001 over the base year 1998. Faced with rising input costs, 60 per cent of which is on account of benefits of labour wages and an overwhelming majority of gardens have reported huge losses continuously for the past two years. With cost of production being estimated at around Rs 50/kg of tea, there is no way that gardens can sustain in the long run if the current bearish trend in prices continues. The main components of cost comprises labour cost at 50 per cent, manufacturing cost 14 per cent and administrative cost 12 per cent. Some of the estates are facing closure, while others have managed to survive by reducing wages with the co-operation of the workers unions. In a labour-intensive industry like tea, labour laws and management becomes crucial in determining the final output- both in terms of quantity and quality. Labour cost is generally fixed, and if production suffers on account of bad weather or pests, per unit cost of production goes up significantly. The proportion of variable elements in labour cost depends on labour legislation and extent of casual and temporary workers employed. Cost of production in the competing countries like Kenya and Sri Lanka is lower due to labour cost advantages, better productivity from younger tea bushes and state support. Indian tea is not price competitive except for some niche segments. Further, in India , tea being a plantation crop, is subjected to multiple level of taxes including the Agricultural Income Tax unlike other agricultural commodities.

To sum up, the average productivity of labour in India has remained significantly below that of competing countries, which has led to the India tea industry’s cost of production to be one of the highest among the tea producing nations.

Rising imports – a serious concern

The tea industry has now begun to face a new problem. There has been a phenomenal rise in tea imports into the country in 2004. Disturbed by this trend, the tea trade has moved the union commerce ministry to impose a 50 per cent value addition on imported tea to be fit for re-export and also to take a serious look into the minimum standard set for Indian teas under the Prevention of Food Adulteration Act and Rule for such teas. The objective is clear: India , self-sufficient in tea, should not become a dumping ground for inferior and cheaper teas produced abroad. Import of tea into India has registered a significant jump from 9.86 mkgs in 2003 to 30.52 mkgs in 2004, marking a rise of more than 200 per cent. The average import price has dropped to Rs.45.68 per kg from Rs.58.32 per kg. Most of the imported tea has come from Vietnam , showing a rise to 17.28 mkgs from a negligible 1.11 mkg in 2003. Even imports from Kenya has risen to 3.30 mkgs from 1.22 mkgs in 2003. Apart from these two countries, imports from Nepal , Indonesia and Sri Lanka has remained more or less the same as in the earlier year.

Major companies in India exiting tea plantations

The exit of Tata Tea and Hindustan Lever Ltd. (HLL) from the business of tea plantations appears to have shaken industry associations and labour unions. They perceive greater adverse implication in this decision than the exit itself. For the major companies in India , producing tea in bulk no longer appears to be attractive due to high costs, huge manpower and extremely low competitiveness. As a result, two companies – Tata Tea and HLL – have opted out of plantation activity. These two companies are now concentrating only on marketing tea where the margins are higher. Tata Tea, the largest producer of tea in India , has divested stakes in its south Indian gardens. This was followed by HLL, which announced that they were transferring their gardens in Assam and Tamil Nadu to a wholly owned subsidiary. According to one source, these big companies are realising for several reasons that there is hardly any scope for development on the production front. They see growth in packet tea business. Hence, the leading companies are focussing on marketing. They are also afraid of maintaining a huge workforce, with many social benefits. Vertical integration has its uses, but for both Tata Tea and HLL, the plantations have been a drag on profitability – mainly on account of the huge welfare costs that tea garden managements have to shoulder under the Plantations Labour Act.

The tea industry experts have suggested that the expenditure undertaken by the plantation industry on account of implementing the provisions of the Plantations Labour Act can be reimbursed to the tea estates by the government – the annual cost to the government on this account would be around Rs.291 crore.

Other Issues

The Indian tea industry has witnessed the worst economic situation over the last 5 years. Caught in cobweb of internal and external problems, Indian tea is today struggling hard to find its lost glory. Despite some of the unique advantages, namely, largest production, huge domestic consumer base, diverse and unique climatic conditions, rich cultivation tradition, majestic art of tea making/processing, the tea industry in India is ailing.

The Indian tea sector is thus at the cross-roads. Stiff competition from the producing-exporting countries like Sri Lanka, China, Indonesia, Kenya and Vietnam; various tariff and non-tariff measures imposed by importing countries such as Russia, Egypt and Iran; lower offtake by Russia due to change in consumer preference; costlier Indian tea due to higher cost of production; low yield levels per hectare and rising imports merit close attention.

In view of the above difficulties, there is now a need for concerted efforts to harness the talent and skills available within the industry and adopt a totally innovative approach. The steps to be undertaken are as follows:

1)      Bring more area under tea cultivation.

2)      Increase the productivity substantially (In the year 2000 the average yield of tea in India was 1972 kgs/per hectare against  2332/kgs in Kenya)

3)      Export more of high value blended teas, as well as packaged brand teas, which will fetch higher realisations.

4)      The need of the hour is to increase productivity of both land and labour. Keeping this in view, Indian Tea Association (ITA) has strongly recommended substantial assistance for replanting of tea bushes.   

5)      Thoroughly overhaul and improve our marketing strategy and methods so as to get a higher market share as well as capture new markets. Tea merchant exporters have urged the Union Government to concentrate more on marketing of tea in the overseas market rather than just laying stress on the production front.

6)      Investment on research has been too low. It is time the industry looked at developing new products, like liquid teas.

7)      The tea industry has to be persuaded to take up immediate measures to improve productivity and invest in re-plantation. Tea plantations provide a livelihood to lakhs of workers, and the government cannot afford to ignore the signs of long- term decline. In India , especially plants more than 50 years old need to be replanted immediately. Total investment required for this is estimated at Rs.4,500 crore. It may be recalled that the Union Budget 2005-06 has allocated a meagre amount of Rs.82 crore for re-plantation.

8)      In India the cost of tea production is much higher than in other producing countries because of the higher labour wages and social costs. There is no other alternative but to devise better methods of plucking (a labour-intensive operation). Research and development efforts will have to be focussed in this area.

9)      According to The Indian Tea Exporters Forum (ITEF) a number of benefits that were instituted to promote tea exports are withdrawn. For instance, DEPB on tea has been reduced to one per cent from two per cent. Moreover, the introduction of value added tax (VAT) makes it mandatory for exporters to first pay VAT and then seek refund three months later. This would lead to more working capital requirements and reduce competitiveness compared to other tea exporters.

10)  There is an urgent need to help the small growers in India to not only improve their plucking standards, but also handle the plucked leaf in a proper manner and transport it to the factories in as fresh a condition as possible. The corporate producers will have to guide them in this respect for the survival of the tea industry. In other words, a synergy between corporates and small growers is very much required. There is a lesson to be learnt from Sri Lanka in this respect. Of the 1,81,000 hectares under tea in Sri Lanka, 42 per cent is owned and managed by small growers, who account for 62 per cent of the country's production. In other words, the productivity of the small grower sector is much higher at 2,216 kgs of tea per hectare compared to 1,151 kgs per hectare in the corporate sector. What is even more surprising is that the quality of the end-product is as good as it is in the corporate sector because of the strict control on the standard of leaf, advisory visits by the factory personnel and a regular dialogue between the factories and growers.

11)  A sense of belongingness has to be instilled among the labourers by taking care of their needs in totality. This means remunerating labourers not just in terms of annual hike in wages, but taking care of their career growth through regular training and vocational programmes, educational and placement facilities for the children of the labourers, health and recreational facilities for the family members of the workers and several such other human resource policies. This would do much in the direction of containing the labour unrest. Above all, labourers should be made to understand the fact that 'teas are made in the field' and that it is in their hands to give their company the best quality and quantity teas, which would ultimately reflect the survival of the companies. 

*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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