Current Economic Statistics and Review For the Week 
Ended June 11, 2005 (24^th Weekly Report of 2005)

  I

Highlights of  Current Economic Scene

PERFORMANCE OF INDUSTRIAL SECTOR

o       The data on Index of Industrial production for the month of April 2005 has put fears of a possible slowdown in the industry sector to a temporary halt. Despite, the slowdown in the growth of the six core infrastructure industries in fiscal year 2004-05 and April 2005, the index of industrial production registered a growth rate of 8.8 per cent in April 2005. This is fractionally lower than the rate of expansion of 8.9 per cent in April 2004. Both mining and electricity generation slowed down in the first month of the current fiscal year when compared to April 2004. While mining registered a growth rate of only 3.1 per cent in April 2005 as against a much higher growth rate of 9.1 per cent in April 2004, electricity generation increased by only 3 per cent as against a robust growth rate of 10.3 per cent. Manufacturing, however expanded by 10 per cent as compared to 8.8 per cent.

o       Under the used based classification, both basic goods and intermediate goods industries have slowed down to 5.9 per cent from 8.0 per cent and from 12.4 per cent to 2.3 per cent, respectively. Capital goods industry has started on very good note in the current fiscal year registering an increase of 24.5 per cent as against 10.1 per cent in April 2004. Both consumer durables and non-durables have also posted impressive growth rates at 18.6 per cent and 11.4 per cent in April 2005, respectively.

o       Under manufacturing industries, five industries have registered double-digit growth rates in the first month of the current fiscal year. Two industries have registered negative growth rates and four industries have posted low growth rates between 0 and four per cent. The remaining six industries have witnessed growth rates between 4 per cent and 10 per cent.

CORPORATE SECTOR

o       A healthy performance by the corporate sector has led to reaping dividends for the investors. According to Business Standard Research Bureau study of 573 companies, 54 per cent of them have increased their dividend for 2004-05 while another 22 per cent have proposed to maintain the payout at the previous year’s level. It is observed that 48 companies declared more dividend than what they had paid last year. 

o       In 2004-05, steel, cement and hotels posted better growth rate in earnings per share (EPS) in comparison to that in 2003-04. Steel sector performed remarkably in 2004-05 due to increase in volumes and prices, as a result of rise in domestic and global demand. Apart from increase in domestic demand, cement industry witnessed growing demand from the Middle East Asia.

• Policy Issues

• Tata Steel signed a Memorandum of Understanding (MoU) with the Chattisgarh government for setting up a five million tonnes greenfield steel plant in the state. The first phase of the steel plant is likely to be set up by 45-60 months subject to all statutory clearances.

• The Ministry of Steel has cleared the IISCO and Steel Authority of India and awaits the nod of the cabinet. The new entity would have at its disposal 35-40 million tonnes iron ore reserves lying with IISCO.

• Bombay High Court cleared its petition for the demerger of National Organic Chemicals Industries Limited’s (NOCIL) various divisions. The assets of its petrochemicals division and plastics products division would be demerged and vested in Relene Petrochemicals Private Limited and NOCIL Petrochemicals Limited respectively.

• Delhi High Court has approved the scheme of amalgamation of Bharti Cellular Limited and Bharti Infotel Limited with Bharti Tele Ventures Limited. The date of merger is April 01, 2004.

• Mergers and Acquisitions

• McLeod Russel India Limited –the bulk tea company of the B.M. Khaitan group- has decided to acquire a majority stake in Magor held Williamson Tea Assam for Rs. 168.66 crore. This would not only rationalise cost but also lead to premium tea quality for customers.

• Tata Tea has decided to merge its wholly owned subsidiary Tata Tetley, with the company. The merger is expected to compensate for the losses in Tata Tea’s topline after the recent divestment of parts of its portfolio of tea gardens.

• Essar Steel bought out Stemcor of the UK from two companies –Hy-Grade Pellets (HGPL) and Steel Corporation of Gujarat (SCGL) for around Rs. 1,950 crore. This makes Essar Steel a fully integrated steel producer with end-to-end control over raw materials, processes, technology and finished products. It would be funded through equity by way of issuance of compulsorily convertible preference shares as approved by shareholders and regulatory authorities.

• Raymond announced a 50:50 joint venture with Lanficio Fedora of Italy to manufacture woolen products. The total cost of the project was Rs. 40 crore for the first phase of its operations.

• Company Issues

• Munjal Auto Industries will invest Rs. 50 crore to expand its facilities at Waghodia, near Baroda and at Binola, near Gurgoan by about 50 per cent. The Binola facility will now manufacture a component of automotive gears. Almost the entire production of Munjal Auto is supplied to hero Honda Motors.

• Reliance Industries Limited has agreed to supply natural gas to the proposed 3,740 MW power project of Reliance Energy Generation Limited at Dadri. The Dadri project is expected to be the world’s largest gas based power generation plant in a single location.

• Reliance Energy Limited intends to set up a 12,000 MW coal based power plant in Orissa at a cost of Rs. 48,000 crore. Further, the company has been selected as a preferred partner for Rs. 750 crore joint venture with the Power Grid Corporation of India Limited for a hydro power project in Himachal Pradesh.

• Ranbaxy Laboratories had bought a generic product portfolio of Spanish pharma company Efarmes, SA. The products belong to cardio vascular system, central nervous system and pain management segments. The generic market is valued at US$ 700 million and is estimated to grow at 30 per cent per annum.

• Jubilant Organosys Limited is augmenting its manufacturing capacity for Pyridine and Picoline to 28,000 tonnes per annum. These are used extensively in pharmaceuticals, agrochemicals, shampoos and other industries. This increase in capacity was essential for meeting the rising demand for their products.

• Gujarat NRE Coke Limited became the first Indian country to export coke to Europe . It exported 30,350 million tonnes to Italy . This shipment follows its several consignments to Brazil and South Africa .

• Bombay Dyeing and Manufacturing Company Limited is to set up a 165,000 tonnes per annum polyester staple fibre (PSF) at the existing Dimethyl Terephthalate (DMT) plant site. It is also restructuring its manufacturing base by setting up processing and stitching facility at a different location in Maharashtra .

• IVRCL has bagged Rs. 263 crore project relating to construction, operation and maintenance including strengthening and widening of existing 2-lane road for 4-lane dual carriageway of NH-1 in the state of Punjab on build-operate-transfer basis.

• Nagarjuna Construction Company Limited has secured three new orders aggregating Rs. 200 crore from various clients. These include projects from Gujarat Water Resource Development, Delhi Metro Rail Corporation Limited and Ministry of Defence.

• Dabur Foods invested Rs. 12 crore in an in-house packaging facility in Newai, Rajasthan. This would help in improve the company’s profitability and efficiently supply large quantities of juice to consumers. This is Dabur Foods first foray into packaging in India .

• United Phosphorus purchased Ceoguisa –a distributor and registrant of crop protection products located in Barcelona , Spain . This will provide a strong platform to expand and strengthen its network in Southern Europe and Northern Africa . 

• Company Results

• The net profit of Tata Tea Limited grew by a healthy 40.85 per cent from Rs. 91.53 crore in 2003-04 to Rs. 128.92 crore in 2004-05. The company’s turnover stood at Rs. 899.63 in 2004-05, a growth of 14.98 per cent.

• The net turnover of Bombay Dyeing and Manufacturing Company Limited increased by 13.26 per cent, to Rs. 1,025.60 crore in 2004-05 from Rs. 905.50 crore in the previous year. However, net profit declined by steep 50.36 per cent from Rs. 53.50 crore in 2003-04 to Rs. 26.56 crore in 2004-05. Its textile business faired poorly in comparison to its DMT (Dimethyl Terepthalate) business. The company is one of the leading producers of DMT, a polyester intermediate.

• Neyveli Lignite Corporation Limited recorded a modest net sales growth of 6.95 per cent, from Rs. 3,001.94 crore in 2003-04 to Rs. 2,806.81 crore in 2004-05.

• Videsh Sanchar Nigam Limited grew by a whopping 100.26 per cent in net profit in 2004-05. It stood at Rs. 756.4 crore in 2004-05 as against Rs. 377.7 crore in the previous year. However, its net turnover grew by a meagre 4.39 per cent, from Rs. 3,164.2 crore in 2003-04 to Rs. 3,303 crore in 2004-05.

• The net turnover of Titan Industries Limited in 2004-05 was Rs. 1,134.66 crore as against Rs. 958.52 crore in 2003-04, a growth of 18.38 per cent. The maximum segmental sales growth was from the jewellery segment. It registered a growth of 25.68 per cent, to Rs. 535.01 crore in 2004-05 as against Rs. 425.68 crore in the previous year. Its net profit grew by a whopping 123.17 per cent predominantly due to its jewellery business.

• MRPL registered a healthy growth of 78.8 per cent in net sales, to the tune of Rs. 2,184.21 crore in 2004-05 in comparison to Rs. 1,221.58 crore in the previous year. Net profit zoomed by 404.93 per cent to Rs. 581.11 crore in 2004-05 as against Rs. 115.08 crore in the previous year.

• Hindalco Industries Limited registered net sales worth Rs. 9,523 crore in 2004-05. It is a growth of 53.39 per cent over Rs. 6,208 crore in the previous year. Net profit grew by 58.47 per cent, from Rs. 838 crore in 2003-04 to Rs. 1329 crore in 2004-05.

BANKING HIGHLIGHTS

• Public sector banking industry wage bill is set to go up by Rs.2,200 crore annually with the signing of the eight wage settlement bill, a 13.25 per cent increase in the wage bill amounts to an additional outgo of Rs.2,200 crore per annum taking the total annual wage bill to Rs.19,000 crore.

• The upturn in the economy has helped banks improve recoveries of bad loans by 12 to 30 per cent in 2004-05. According to bankers the improvement was less on account of the legal amendments to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests (Sarfesi) Act 2002 and more due to borrowers to pay up, stemming from much better cash flows. The banks are witnessing recoveries across all sectors. SBI recovered Rs.1,812 crore  in the financial year 2004-05 as against Rs.1,615 crore in 2003-04.

• The Reserve Bank of India (RBI) has cancelled the license of Swaminarayana Co-operative Bank, Vadodara’s top most co-operative bank.

o       The RBI has allowed banks to fund equity acquisition by Indian companies in overseas joint ventures/wholly owned subsidiaries or in other foreign companies. Hitherto, banks could sanction term loans on merit to eligible Indian promoters for overseas acquisition, provided the loans were approved by the EXIM bank for refinance. The move comes on the back of RBI’s recent move to raise the ceiling on overseas investment by Indian entities in overseas JVs/wholly-owned subsidiaries from 100 per cent to 200 per cent of their networth. RBI has notified that the bank’s policy on financing overseas acquisition should include the overall limit on such financing, terms and conditions on eligibility of borrowers, security margin and in addition, such acquisitions should be beneficial both to the company and the country.

• ICICI Bank has entered into an agreement with Tata Consultancy Services (TCS) for digital certificate issuance. TCS will provide a comprehensive range of public key infrastructure (PKI) services and digital certificates for ICICI Bank, and enable the bank, as a sub-certifying authority, to provide digital certificates to its clients.

INSURANCE

o       Over six years after the insurance sector was opened up to private players in India, AMP Sanmar Life Ltd., one of the first private entrants in life insurance sector, has announced its plans to exit the insurance business in India and is looking at options, including outright sale to an existing or new player or brining in a new partner. AMP Sanmar Life is a joint venture between Australia ’s AMP Life and Chennai-based Sanmar Group. The move has been initiated as the Australian partner AMP Life has decided to exit the life insurance venture in India . AMP Life holds 26 per cent while Sanmar Group owes the remaining 74 per cent in the life insurance joint venture. The sale of AMP Sanmar Life Insurance is unavoidable as the partners are finding it difficult to contribute capital for expansion of the operations of the life insurance venture amidst intense competition in the sector. 

INFORMATION  TECHNOLOGY

• Nasdaq-listed IT services firm Kanbay International, which employs 3200 people in India , is expanding its facilities in Pune and Hyderabad to accommodate over 6500 employees and is also setting up its global training centre in Pune.

• Infosys Technologies Ltd. will increase its staff strength fivefold in its Texas based-business consulting unit Infosys Consulting Inc., by March 2007. The increase in man-power to 500 will strengthen the arm to take on competition from divisions of global bigwigs such as Accenture and IBM.

FINANCIAL MARKET DEVELOPMENTS

·        Capital Markets

§         Primary Market

o       The shares of Cyber Media was listed on June 10 on both the NSE and BSE; it ended the day at a premium to the issue price of Rs 60 at R105.85 and Rs 105.45, respectively.  

o       Yes Bank is tapping the IPO market through sale of 7 crore shares at a face value of Rs 10 each through 100 per cent book building issue in a price band of Rs 38 to Rs 45.    

§         Secondary Market

o       For the second time in the past three months, the BSE sensex has reached closer to the psychologically important barrier of 7000 mark, but retreated before touching it. On June 10, the BSE sensex touched an intra-day high of 6884 but closed the day at 6782. 

o       During the week, the BSE sensex rose for three days from 6758 on June 6 to 6859 on June 8, but as the investor began booking profits at higher levels, the BSE sensex fell; nevertheless, over  the week the index gained 29 points. On the other hand, the NSE nifty fell by 1.75 points over the week to close at 2090.60. The surge in the index has been attributed to the rise in Reliance group stocks, which witnessed an upswing after reports of an early settlement between the Ambani brothers. Also due to, the FIIs turning net buyers during the week, and advance of south-west monsoon. Market, however, remained impervious of rising global crude oil prices.

o       FIIs have turned net buyers of equities in June; between June 1 and 10, the net FII investment stood at Rs 1,714.80 crore with purchases of Rs 6,420.90 crore and sales of Rs 4,706.10 crore. While, mutual funds have tuned net sellers between June 1 and 13 to the extent of Rs 186.84 crore with sales at Rs 2,088.09 crore and purchases at Rs 1,901.25 crore.  

o       Among the sectoral indices of BSE, the BSE consumer durables and BSE bankex showed a rise of 4.31 per cent and 3.44 per cent, respectively. The bankex index showed buoyancy given the news that government is considering allowing public sector banks to issue preference shares to shore up their capital base even as the finance ministry is not willing to bring down the government stake in these banks to below 51 per cent.  Further, RBI allowed banks to finance acquisition of equity in overseas companies. While BSE sensex gained 0.43 per cent over the week, the BSE mid-cap and small –cap surged by 1.3 per cent and 0.98 per cent, respectively. 

o       With a surge in the investor’s interest in mid-cap and small-cap share and sharp rise in the number of bulk deals, the turnover on BSE in cash segment on June 10 has over taken the turnover in NSE for the first time in more than a decade. 

·        Derivatives    

• Trading activity in F&O segment of NSE has been marginally better than in previous week with outstanding positions in futures segment touching an all time high. The average daily turnover was in excess of Rs 9,500 crore, in the range of Rs 8084.71 crore to 10991.55 crore during the week under review  as compared with a range between Rs 7903.2 crore and Rs 10049.3 crore in the previous week.

·        Government Securities Market

§         Primary Market

o       The RBI re-issued 7.37 per cent 2014 and 10.25 per cent 2021 for notified amount of Rs 6,000 crore and Rs 4,000 crore, respectively, at cut-off yields of 6.91 per cent for the short-term paper and 7.47 per cent for the long-term.

o       Eleven state governments have announced a sale of 10-year stock on June 14 for an aggregate amount of Rs 2,481.15 crore through yield-based auction using multiple price auction method. the states that will tap the market are Arunchal Pradesh, Andhra Pradesh , Assam , Bihar, Himachal Pradesh, Jharkhand, Madhya Pradesh, Maharashtra, Manipur, Tamil Nadu and West Bengal . 

§         Secondary Market

o       The call rates ruled easy during the week except on the reporting Friday as the banks were covering their positions. The statement by the RBI governor that interest rate may not rise at the next policy review, propelled the market sentiments. Despite the easing of inflation rate, the market remained cautious in anticipation of the state loan flotation. In tandem with the rise in US treasury yields, the domestic yield too rose.

o       The RBI has permitted non-banking financial companies and residuary non-banking companies to tap the repo market, thereby widen the market. 

·        Bond Market

o       Despite the government’s permission to the non-banking finance companies to tap the ECBs, a number of companies seems to favour domestic borrowings. Among them, HDFC is raising close to Rs 400 crore, Food Corporation of India (Rs 977 crore), Rural Electrification Corporation (Rs 1000 crore).   

·        Foreign Exchange Market

o       The rupee-dollar exchange rate began the week on a firm note following the news that the government has decided to allow NBFCs to borrow from abroad. Meanwhile, the dollar rose in the global markets following US Federal Chairman’s testimony, which played down concerns over US economic growth and indicated that ‘measured’ interest rate hikes would continue.

o       Forward premia rose sharply despite spot rupee appreciation and indications of future hike in US Fed rate given by US Fed chairman

·        Commodities Futures derivatives.

o       NCDEX has launched Electrolytic Copper Cathode futures contracts. The initial contracts available for trading will be for expiry dates in July 2005 and August 2005. The lot size is 3 MT in order to benefit the small investors.

o       With the reports of arrival of monsoon in various part of country, the domestic spot sugar prices fell thereby dragging the sugar futures prices on NCDEX. Last week, both the spot and futures sugar prices had firmed up on reports of deficient rainfall.

o       MCX has approached the FMC with proposals to start futures trading in coal and ethanol. FMC has referred these proposals to the ministry of coal and the ministry of food and consumers affairs, respectively.   

• Over the week, the NCDEXAGRI index has risen from 1227.84 on June 6 to 1241.29 on June 11. The rainfall index also of NCDEX has shown lower values between 6.60 and 17.20 during the same period indicating less rainfall.

PUBLIC FINANCE

• The revenue deficit in April 2005 is slightly better than in the same month last year. It stands at 28.3 per cent of the budget estimate as against 30.5 per cent in the corresponding period last year. In absolute terms, the revenue deficit in April 2005 was Rs 27,016 crore. The fiscal deficit in the first month of the current fiscal year as a percentage of the budget estimate was at 18.8 per cent.  Revenue deficit was largely better due to higher revenue receipts during April 2005 at Rs 1,717 crore (0.5 per cent of the budget estimate). The total expenditure as a percentage of the budget estimate was at 5.9 as against 6.3 per cent in April 2004.

• The government has announced that services like site formation; clearance, excavation, earth moving and demolition provided during the construction of infrastructure projects will be out of the purview of service tax. Also, commercial or industrial construction services in the construction of major or minor ports have also been exempted. It has also waived the tax for polishing and finishing services rendered to the gems and jewellery sector. These exemptions would be effective from June 16. Subsequent to the demands from the shipping industry, the finance ministry has said that the handling of ships in a port outside India or any other services received from a non-resident in the course of sailing of an Indian ship or a chartered ship registered by an Indian citizen or company, would be exempt from service tax. The ministry has also decided to extend the abatement of 67 per cent for services provided in the construction of residential complexes. This was available to only commercial complexes. An abatement of 67 per cent means that service tax will be payable only on 33 per cent of the gross amount. The ministry has also taken the view that any taxable service received and consumed by any individual outside India for personal purpose will be exempt from tax. The ministry has also ammended some provisions of Service Tax Rules, 2005. The registration of input service distributors and small service providers, whose aggregated annual value of taxable services exceeds Rs 3 lakh, has been made mandatory.

• The finance ministry has tightened the norms for service providers who want to avail of the benefits of export of services. Interior decorators, architects, chartered accountants, marketing research agencies and other service providers will now have to fulfill the twin criteria of services delivered and used outside India and payment for services in convertible foreign exchange.

• The Finance Ministry has directed high spending ministries like rural development, power, health and family welfare and education to submit monthly accounts detailing their progress on expenditure. The move has been aimed at matching outlays with outcomes. To ensure better control over expenditure, the ministry has also initiated a comprehensive exercise to strengthen the role of financial advisors in all central ministries.

o       The Central Board of Direct Taxes aims at adding 15 per cent more assesses in 2005-06. The government also intends to increase the number of assesses declaring an annual income of over Rs 10 lakh by 50 per cent. It is estimated that there are over 80,000 income tax assesses in the over Rs 10 lakh bracket. The board has also outlined a plan for computerisation that will facilitate electronic filing of return through e-intermediaries and digital signatures. Also, an interactive facility called ‘sampark software’ for assessment year 2005-06 is expected to be introduced soon.

INFLATION

• The annual rate of inflation as measured by WPI, on point-on-point basis, stood at 5.20 per cent (provisional) for the week ended May 28, 2005 in comparison to 5.38 per cent (provisional) for the week ended May 21, 2005.

• WPI for ‘All Commodities’ (Base: 1993-94=100) for the week under review, increased fractionally by 0.10 per cent to 192.2 from 192.0 in the previous week. The index of primary articles rose by 0.21 per cent, from 188.7 per cent in the previous week to 189.1 per cent in the week under review. Within this group, the index of food articles group increased by 0.26 per cent to 191.1 per cent as against 190.6 per cent in the previous week. In contrast to the previous week, prices of beef and buffalo meat and poultry chicken were higher by 13 per cent and 11 per cent respectively. In the index for non-food articles, prices of coir fibre declined by 19 per cent in comparison to the previous week.

• The index of fuel, power, light and lubricants remained unchanged at its previous week’s level of 293.1.

• The index of manufactured products rose by 0.06 per cent to 170.7 from 170.6 in the previous week. Within this group, the index of machinery and machine tools group increased by 0.48 per cent to 145.7 from 145.0 for the previous week due to higher prices of complete engines (4 per cent). However, mono block pumps were cheaper by 4 per cent. The index of ‘basic metals alloy & metal products’ group declined by 0.27 per cent to 221.4 from 222.0 in the previous week because prices of basic pig iron and foundry pig iron; both were cheaper by 3 per cent in comparison to the previous week.

• For the week ended April 02, 2005, the final WPI for ‘All Commodities’ and the annual rate of inflation stood at 191.0 and 5.70 per cent respectively as against the provisional levels of 190.2 and 5.26 per cent respectively.

EXTERNAL SECTOR

o       Resurrection of certain textile units at Kandla SEZ in Gujrat, engaged in imports of second-hand ready-made garments in the country, has raised concerns among the industry experts in the state. These units have tied up with certain NGOs and charitable organisations across the country to sell these garments at a cheaper rate in other states. The import of such garments for domestic sale is leading to a loss in foreign exchange.

o       India and other Asian economies including South Korea , Malaysia and Singapore have led developing countries in outpacing rich nations in outward FDI. The outflow from India crossed $5 billion during 2003.

CREDIT RATINGS

o       Crisil has upgraded the rating on Jindal Saw Limited's fixed deposit programme to 'FA/Stable' from 'FA-/Stable', reflecting a more diversified product profile, after successful commissioning of its integrated cast-iron-ductile-iron project without cost overruns.

o       In an another exercise, the agency has assigned P1+ rating to the Rs. 1.5 billion  (enhanced from the earlier Rs. 1 billion) short-term debt programme of Indiabulls Financial Services Limited. The rating is underpinned by high absolute capital levels and the strong market position of the Indiabulls group in the retail equity broking segment

• It has assigned AA/Stable rating to the Rs. 50 crore non convertible debentures programme of Sundaram Home Finance Limited (SHFL), while also reaffirming the FAA+/Stable rating assigned to the fixed deposits programme. Both the ratings reflects SHFL’s strong parentage and the benefits that accrue to it as a subsidiary of Sundaram Finance Limited.

o       Fitch has assigned an F1 (ind) rating to the commercial paper programme of Bhushan Ltd. aggregating to Rs. 150 crore.

o       Icra has assigned LAA rating to the Rs. 125 crore non-convertible debentures programme of Birla Home Finance Limited. The rating reflects the strength derived from its status as a wholly owned subsidiary of BHW Holding, which is the holding company for the operating entities of the BHW group of Germany

Theme of the week:

Oil Prices In An Unpredictable Mould

1.                  Volatility has been the hallmark of the behaviour of oil prices during recent months. A more than five times surge in oil prices, from $ 10 a barrel in 1998 to above $ 50 in October 2004 and year 2005 has prompted talk of new era of sustained high prices. The recent volatility in prices is one of several challenges facing the oil industry. The question that arises in this context is why prices shot up in the first place. The short explanation is that oil markets have seen an unprecedented combination of tight supply, surging demand and financial speculation. On supply side factor is OPEC’s clever manipulation of output quotas. Back in 1997, at a ministerial meeting in Jakarta , the cartel decided to raise output just as the South-East Asian economies were hit by a crisis sending prices plunging to $ 10 a barrel. Desperate to engineer a price rebound, Saudi Arabia targeted inventory levels; whenever oil stocks in the rich countries of the OPEC started rising, the OPEC would reduce oil output to stop oil softening. This strategy worked. Another supply-related factor has been the shortage of petrol in the American markets. Over the past year or two, prices have spurred, as refineries have been unable to meet demand surges. Supply concerns have already played a crucial role in generating fear premium. The profit-wracking uncertainty before the invasion of Iraq in March 2003 and subsequent unrest in Iraq and bomb blast in Saudi Arabia soon after pushed up prices to higher level than the fundamentals would seem to justify. Other supply worries arose from the crackdown by the Russian president, Vladimir Putin, on the oil company Yokos and from civil strife in Venezuela and Nigeria .

2.                  Supply constraints also coincided with a huge boom in oil demand. Last year, the global economy grew at a robust pace of 5.1 per cent, which got reflected in high oil consumption. Oil consumption rose by 3 – 4 per cent instead of the usual 1- 2 per cent. Nearly a third of this growth was accounted for by China , where oil consumption rocketed by nearly 16 per cent. According to a report in Australia and New Zealand Banking Group, higher than expected demand growth in China contributed to the bank lifting its forecast for 2005 world consumption by 1.6 per cent to 94.2 mpd. However, a high growth in China ’s demand for oil seems to be a temporary phenomenon. First of all, there are not enough number of cars in all of China to guzzle that much oil. Secondly, much of the 2004 rise was related to the country’s overheated economy and is unlikely to be repeated. Over the past two years, as the country has developed its oil infrastructure, it has needed to fill pipelines storage tanks and the like but these are one off purchases. It was not China alone that used lot more oil. India and American oil consumption have also been robust. Whatever the reason, despite the sharp rise in oil prices, global oil demand in 2004 grew at the fastest rate in over 25 years. This appears to defy the conventional wisdom that high prices draw down demand.

3.                  In the context of bridging demand and supply gap, one should appreciate the role played by Saudi Arabia in times of crisis. It has maintained a generous buffer that it has used to prevent the market from overheating during unexpected supply interruptions. For example, during the Iran-Iraq war, the first and second gulf wars and Venezuela ’s political crisis of 2003, oil exports from these countries were disrupted. But the Saudis immediately started pumping more oil and single handedly prevented a price surge. All this could happen because Saudis could maintain a spare capacity. But the buffer has been in decline for some years because OPEC has not been investing sufficiently to keep pace with growing demand. As a result, global spare capacity last year dropped to around 1 million barrels per day, close to a 20-year low. Almost all of this was in Saudi Arabia .

4.                  However, in the present circumstances, the OPEC countries are unlikely to rush to build lots of spare capacity because they are worried that another price collapse is in the offing. In the past every oil spike has been followed by recession whether it was linked to Arab-Israeli war in 1973, the oil embargo that followed the Iranian Islamic Revolution in 1979 or the Gulf War of 1990 that followed Iraq ’s invasion of Kuwait . When oil price hit $ 55 late last year, spare capacity was less than 15 per cent of 8.7 million bpd peak reached in 1985. For most of OPEC countries it makes sense to try to maximise prices in the short term because their reserves of oil may be depleted soon. On the other hand, the Saudis are sitting atop at least 260 billion barrels of proven oil reserves, far more than Libya , Venezuela , Indonesia and Nigeria combined. Even at current production levels of around 10 million bpd it makes them the top exporter. They will not want prices to stay too high for too long or else investors will put money into non-opec oil or alternative fuel.

5.                  Saudis also remember the lessons of 1970s oil shocks when the biggest looser were not the oil consuming economies but the petro-producing economies of OPEC. One of the members of OPEC observed that they thrive on the economic growth of oil importing countries where growth gets reflected in energy demand. That is why Saudis have acted as the voice of moderation within OPEC. At the most recent OPEC meeting held in Iran on March 16^th, the Saudis, in fact tried to calm other members from raising prices. They were in agreement for a raise in oil production quotas to boost global oil inventories that looked like a reversal of the cartel’s established policy of keeping OPEC’s inventories tight and prices high. Since mid-March OPEC has increased production by 2 mpd leaving global markets well supplied; from 27.7 mt in mid-March, supply has been raised to 29.7 mt now.  The lion’s share of this extra crude supply is being shared by Saudi Arabia along with fellow Gulf procurers, Kuwait and UAE. 

6.                  Crude oil prices this year may be 18 per cent higher than expected because of increasing demand, OPEC’s management of prices and slowing Russian output. Crude oil prices on the New York Mercantile Exchange have averaged $ 50.83 a barrel so far this year (end of April 2005), 43 per cent higher than in the same period last year. Oil for June delivery is being quoted at $ 49.10 a barrel. There is expectation that the price would touch the $ 50 a barrel mark during the current quarter before heading towards the $ 40 mark by the end of the year. According to a recent World Bank report, crude oil on average cost $ 18 a barrel in 1999 and $ 38 in 2004, while oil prices in the spot and futures markets have risen to well over $ 50 in recent

7.                  In a report prepared by the International Monetary Fund (IMF), it is estimated that the global economy has grown at 5.1 per cent in 2004, while the same is projected to grow at 4.3 per cent in 2005 and 4.4 per cent in 2006. The IMF forecasts are based on an assumption that world oil prices would average around $ 46.50 a barrel this year and $ 43.75 in 2006.

8.                  In India , since more than a year now, the oil ministry has been bearing the impact of higher prices of fuels. After realising that this cannot go on for long in the face of surging global oil prices, the oil ministry has started making appeal for revision of prices. Additionally, it has suggested the creation of a stabilisation fund to avoid extreme volatility in oil prices. This has the approval of the union finance ministry. As it is, oil producing companies like ONGC and OIL pay a cess of Rs 1,800 crore per tonne on oil production. Put together, the cess and drawback amount could lead to the creation of a corpus of around Rs. 6,000 crore.

9.                  Meanwhile, the left parties, the coalition partners in the Congress led government, are vehemently opposed to any hike in fuel prices. Their concern is natural, as they do not want to see common man suffering from the burden of high fuel prices. On the other hand, the petroleum ministry has moved the cabinet for an immediate increase in petrol price by at least Rs 2.50 a litre and that of diesel by Rs 1.30 a litre. The minister has also demanded that retail prices of two subsidised fuels – cooking gas and kerosene, which have remained, unchanged for almost a year now – be raised. Although the required increase in case of petrol and diesel works out to be higher at Rs 4.59 a litre and Rs 4.97 a litre respectively.

10.              Although uncertainty over the rise in the domestic prices of petrol and diesel looms large, a price rise in near future is inevitable. Global oil prices have been rising, but oil product prices have remained unchanged in India for some time now. While it is true that a price rise will hurt the common man, but for how long the consumers can be insulated from the rise in world oil prices? Also, as world oil prices rise and show no sign of returning back to their original level, the domestic consumption of oil needs to be adjusted to higher prices. A hike in prices is meant to offset the spiralling cost of crude imports. Oil imports during 2004-05 were 41.2 per cent higher than in the previous year. The price rise at the retail level will also neutralise the impact of budgetary taxes on the oil sector including changes in excise duty as well as levy of an additional cess for road development. National oil companies are also facing huge losses, running into crores of rupees as they are bearing the brunt of high international prices. This kind of a situation with high import bill and huge losses by oil companies cannot be sustained for too long. However, it is believed that the burden on the common man can be minimised by reducing budgetary levies on the imports of oil and also by saving on tax concessions granted to the exports of petroleum products. It appears that the government is grappling with these issues.

*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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