Current Economic Statistics and Review For the Week 
Ended July 23, 2005 (30^th Weekly Report of 2005)

  I

Highlights of  Current Economic Scene

AGRICULTURE

o The overall foodgrain stocks – driven by low wheat stocks in the Central pool – have declined below the minimum buffer norms by about 25 lakh tonnes, as on July 1. The government plans to compensate low wheat stocks by offering rice instead of wheat for the Food-for-work programmes in the North-East and Kerla. As on July 1, 2005, there was an estimated stock of 245 lakh tonnes of foodgrains in the central pool, comprising 145 lakh tonnes of wheat and 100 lakh tonnes of rice (including unmilled paddy). However, the buffer norms set by the government for July 1, requires 269 lakh tonnes of foodgrains. 

o NABARD has come up with a package to assist commercially viable mills that have operational surplus to pay their dues, including bank dues, within the stipulated time, and to mills that may need an extended period of time for repayment. This plan of action forms a part of its efforts to revitalises the Sugar Industry. Based on the need, loans of the former category of mills will be rescheduled for the period of up to five years and in the latter category, up to a period of 15 years with a two-year moratorium on payment of interest and repayment of principal. The package will cover all mills in co-operative sector and private sector in Andhra Pradesh, Bihar, Karnataka, Maharashtra and Tamil Nadu. All financial institutions and banks will charge a maximum interest of 10 per cent a year. This revised rate is applicable from July 1, on their outstanding and future loans and financial accommodation to sugar mills in private and cooperative sector. 

o To check the use of bogus ration cards, the Maharashtra Food and Supplies Department is planning to issue computerised ration cards containing the photo-identity of cardholders. The pilot project will start in Mumbai and Solapur, and thereafter it will be launched in the rest of the State. The move will not only prevent the racket of bogus ration cards from flourishing, but also help in identifying illegal migrants who have acquired these fraudulent cards. Total number of ration cards in Mumbai is 39,73,979. Among these 16,971 are issued under Antyodaya Scheme, 34,47,616 under Saffron Ration Cards Scheme (Ration Cards issued to Families having annual income less than Rs. 1 Lakh), 4,82,429 under White Ration Card Scheme (Ration Cards issued to families having annual income above Rs. 1 Lakh) and 26,963 are issued to people below poverty line. 

o Commerce and Industrial Minister of India has called for an end to export subsidies and domestic support in the farm sector by developed countries, which should precede the market access to developing countries. He also made it clear that India will not go beyond a point to open up its market in the ongoing talks in the Doha round of the World Trade Organisation (WTO).

BANKING HIGHLIGHTS

o ICICI Bank has tied up with Europe’s financial powerhouse Fortis for offering asset and wealth management services, estate planning and corporate services to non-resident Indians worldwide. ICICI Bank is the first Indian bank to offer global wealth management solutions to its clients in India and abroad. 

o Bank of India has tied up with Asit C Mehta Investment Intermediaries Ltd. (ACMIIL) to facilitate launching of various capital market related products like on-line trading in shares, spot-financing, lending against demat shares and IPO financing. ACMIIL, a corporate member of NSE, BSE and OTCEI has composite presence in equity, debt, forex, commodities, depository and derivatives segments. The bank has also launched a web-based remittance solution, Star-e-Remit, in partnership with Bank of New York.

o Punjab National Bank (PNB) has commenced 12-hour banking service at 650 centralised branches in 41 cities across the country in its bid to become customer-friendly. 

INSURANCE

o Private sector insurance companies, ING Vysya and IFFCO-TOKIO have announced a tie-up with Rajkot District Co-operative Bank in Gujarat to provide general insurance and life insurance policies to the customers of the bank. Rajkot District Bank, which has 2.37 lakh depositors, is the first bank in Gujarat to enter into such kind of tie-up with a private insurance firm. 

o Bajaj Allianz, general insurance company has tied-up with Yes Bank to market its insurance products. For Bajaj Allianz, the bancassurance channel brought in 7 per cent of the business in 2004. 

o Country’s biggest company Life Insurance Corporation of India (LIC) is planning to come out with an initial public offer (IPO) by December 2005 to meet the stipulated Insurance Regulatory and Development Authority (Irda) norm of having a minimum paid-up capital of Rs.100 crore. LIC was formed by an act of Parliament in 1956 with a paid-up capital of Rs.5 crore only and entirely subscribed by the Government of India (GoI).

o ICICI Lombard general insurance has launched a travel insurance scheme for students going abroad for studies. The new scheme ‘plus plan’ is an improvement over the company’s earlier ‘gold’ and ‘silver’ plans and is compliant with requirements of universities all over the world. 

INFORMATION TECHNOLOGY

o Software major Satyam Computer Services Ltd. has reported a 16.15 per cent rise in its net profit to Rs.190.19 crore in the first quarter of the current fiscal year over the corresponding period in the last fiscal year. The company has added 31 new customers in the first quarter and has acquired Singapore-based Knowledge Dynamics Pte, a high-end consulting solutions provider in the Business Intelligence area, in a $3.30 million all-cash deal. 

TELCOM

o In a major acquisition in the telecom sector, the Ruia-managed Essar Group has bought a controlling stake in BPL Communications for a consideration of over Rs.4,400 crore (Rs.44 billion). With this acquisition, Hutchison-Essar would have services in 21 circles. BPL Communications owns 74 per cent stake in BPL Mobile Communications (operations in Mumbai) and 100 per cent in BPL Mobile Cellular (operations in Maharashtra and Goa, Tamil Nadu and Pondicherry and Kerala). The BPL Mobile brand will continue to exist during the transition period and will eventually switch to Orange or Hutch as the case may be. JM Morgan Stanley advised BPL Communications on this deal.

FINANCIAL MARKETS

• Capital Markets

 Primary Market

o The IPO of IDFC which opened on July 15 with an offer to sell 40.36 crore shares has been oversubscribed by 14 times on the very first day of its opening. 

 Secondary Market

o During the week, reports of strong monsoon, Yuan revaluation and lower crude oil prices, drove the market sentiments higher. Also, both FIIs and mutual funds remained net buyers of equities. As a result, the BSE sensex recorded its highest intra-day gain in nearly five months by moving up by 118.98 points to close above the 7400 mark for the first time ever at 7423.3 on July 22. The NSE nifty gained 35.10 points to 2265.60. Over the week, the BSE sensex and NSE nifty recorded gains of 151.71 points and 53.05 points, respectively.

o Among the sectoral indices, except BSE FMC all the other indices have registered positive gains. While the BSE sensex recorded a gain of 2.09 per cent, the BSE mid-cap and small-cap have gained 3.17 per cent and 4.33 per cent, respectively. 

o Between July 1 and July 22, FIIs have been net buyers of equities of Rs 5586.90 crore with purchases of Rs 19289 crore and sales of Rs 13702.10 crore. However, they have been net sellers of debt during the same period to the extent of Rs 197.50 crore with sales of Rs 359 crore and purchases of Rs 161.50 crore. 

o Mutual funds have been net buyers during the week under review to the extent of Rs 330.66 crore with purchases of Rs 1627.20 crore and sales of Rs 1296.54 crore.

• Derivatives 

o During the week, the rollover activities have commenced on a firm note from July to August expiry contracts. The daily turnover on the F&O segment of NSE during the week ranged between Rs 11,537 crore and Rs 15,539 crore as compared with the range between Rs 12,070 crore and Rs 19,619 crore during the previous week.

• Government Securities Market

 Primary Market

o The government re-issued 10.25 per cent 2021 for a notified amount of Rs 5,000 crore at a YTM 7.81 per cent (Rs 122).

o RBI has permitted the buyer of security from the primary market to sell the security on the same day subject to certain terms and conditions. 

 Secondary Market

o Ahead of the quarterly review of the monetary policy, the market remained cautious due to divided views over the possibility of hike in the interest rates. The weighted average YTM of 8.07 per cent 2017 eased from 7.21 per cent on July 15 to 7.15 per cent on July 22 as the yield was set as per the market expectations in the auction. However, the marginal rise in inflation rate capped the further fall in yields. 

• Bond Market

o In the bond market, during the week, three issuers have tapped the market to mobilize an aggregate amount of Rs 1040 crore. They are Exim Bank, UTI Bank and NABARD. 

• Foreign Exchange Market

o China has ended its decade-old peg to the dollar and henceforth yuan will fluctuate against a basket of currencies. The Yuan has been revalued by 2.1 per cent from 8.28 to 8.11 per US dollar. 

o The rupee-dollar exchange rate oscillated between appreciation and depreciation in a narrow band of Rs 43.51 to Rs 43.56 till Thursday, July 21. Following the revaluation of the yuan, the rupee appreciated sharply to Rs 43. 13 in the intra-day trades on July 22, but as RBI intervened through the state run banks, the rupee depreciated to Rs 43.39. 

o The six-month annualized forward premia has eased from 1.48 per cent on July 15 to 0.89 per cent on July 22. 

• Commodities Futures derivatives

o The NCDEXRAIN index of NCDEX has risen from 667.70 points on July 17 to 816.10 points on July 23; a higher index implies more rainfall compared to cumulative long period average rainfall up to the date of index.

o The NCDEXAGRI index touched a 52-week high of 1263.12 points on July 19, but thereafter it has fallen to 1256.17 points on July 23. 

o The RBI has allowed listed companies to hedge commodity risks with banks, which meet certain financial criteria regarding their strength. While the hedging is permitted in steel and non-ferrous commodities, others like gold, silver, petroleum and petroleum products are excluded from the list.

INFLATION

o Inflation rate, based on wholesale price index has risen marginally to 4.14 per cent during the week ended July 9, 2005 from 4.09 per cent registered during the previous week. The annual point-to-point inflation rate was at 7.44 per cent in the corresponding week last year.

o The WPI has moved up a tad to 193.9 during the week under review from the last weeks’ level of 193.6 (Base: 1993-94=100). The index of primary articles’ group has risen considerably (by 0.7 per cent) to 190.3 from the previous week’s level of 188.9, mainly due to a considerable increase in the prices of both, food and non-food articles by 0.8 per cent 0.5 per cent, respectively, over the previous week. The index of fuel, power, light and lubricants group has remained unchanged at the previous week’s level of 303.9. The heavy-weighted manufactured products’ group constituting 63.7 per cent of total weight, has also remained unaltered to stand at previous week’s level of 170.6. The prices of food products group in this category showed an increase, but this effect was nullified by the decline in the prices of basic metals, alloys and metal products. 

o The latest final index of WPI for the week ended May 14, 2005 has been revised upwards; as a result both, the absolute index and the implied inflation rate moved up to 192.2 and 5.60 per cent instead of the provisional levels of 192.1 and 5.55 per cent, respectively. 

o The rate of inflation has remained more or less constant at 4.1 per cent during the last four weeks. The contained rate of inflation during last four weeks is attributed mainly to the high base effect. 

PUBLIC FINANCE

o Indirect tax collection rose by 46 per cent to Rs 39,614 crore in the first quarter of the current fiscal year essentially due to buoyant industrial activity, strong imports and booming service sector. Excise duty increased by 50 per cent to Rs 21,650 crore during April-June 2005 compared to Rs 13,711 crore in the same period previous year. Customs collection rose by 40 per cent to Rs 14,704 crore from Rs 10,672 crore in the corresponding period last year.

o The government has collected around Rs 97 crore as advance fringe benefit tax (FBT) in the first quarter of the current fiscal year. State owned companies such as BSNL’s share has been higher in the first installment of advance FBT payment. Employers are paying a 30 per cent FBT on a defined base for various categories of expenses on their employees. Tax on cash withdrawal has fetched Rs 5 crore to the government in the first quarter of the current fiscal year.

o The Central Sales Tax (CST) could be reduced to 2 per cent early next year in the phased removal of the levy. There has been a considerable amount of resistance from states with large manufacturing sectors to the proposed reduction as they were beneficiaries of the CST receipts. All states together get about Rs 20,000 crore as their share in CST collection. The amount would be reduced to half when CST rate is cut to 2 per cent. The Empowered Committee has asked the finance ministry to consider empowering the states to tax imports and bring it under 4 per cent VAT. The proposal would, however, require an institutional amendment as imports can be taxed by the centre. Uniform floor rates are expected to be more widely implemented next year.

o Textile items would come under the purview of VAT from fiscal year 2006-07. States have agreed that the rate will not exceed 4 per cent. The empowered committee of state finance ministers on the VAT had stated that items such as sugar, tobacco and textiles, which are under additional excise duty, would not attract VAT in the first year on account of organisational difficulties.

o The VAT panel has permitted the seven north-eastern states, Himachal Pradesh and Uttaranchal to impose sales tax on diesel at 12.5 per cent, lower than the common minimum rate of 20 per cent. The panel took the decision taking into consideration higher transportation cost of diesel due to difficult terrain in these states.

o The Comptroller General & Auditor (CAG) has chided the Maharashtra Government for continued fiscal imbalances in view of large revenue and fiscal deficits year after year. CAG, in its report for fiscal year 2003-04 observed that increasing ratios of fiscal liabilities to gross state domestic product (GSDP) together with revenue deficit as percentage of fiscal deficit indicate that the state is gradually getting into a debt trap. According to the report, the fiscal deficit of the government and its total resource gap increased by 25 per cent from Rs 14,290 crore in 2002-03 to Rs 17,929 crore in 2003-04 indicating that nearly half of the borrowed funds were used for current consumption. The fiscal liabilities, off-budget borrowings and power subsidy but excluding pensionary liabilities constituted 32 per cent of the GSDP.

CORPORATE SECTOR

o Bajaj Auto Limited reported a net profit of Rs. 210 crore for the first quarter ended June 30, 2005, a growth of 27 per cent over the corresponding previous year. 

o Reliance Energy Limited posted a 42.37 per cent rise in net profit amounting to Rs. 156.63 crore for the quarter ended June 30, 2005 compared with Rs. 110.01 crore for the corresponding quarter in the previous financial year.

o The net profit of Britannia industries declined from Rs.60 crore in the first quarter of 2004-05 to Rs.39.1 crore in the first quarter of the current fiscal year. The sales have jumped from Rs 401 crore to Rs 412 crore during the same period.

o Sify limited, an internet network and e-commerce services company registered a net loss of $2.26 million for the quarter ended June 30, 2005, higher by 79.36 per cent than the net loss of $ 1.26 million announced in the corresponding quarter in 2004. 

o Tata chemicals has posted a net profit of Rs. 65 crore for the quarter ended June 30, an increase of 42 per cent from Rs. 46 crore in the corresponding quarter of the previous year. Income from operations for the quarter of current fiscal year stood at Rs 510 crore marginally up by 1.96 per cent from the corresponding quarter in the previous year. 

o Wipro limited reported mixed results for the quarter ended June 2005. Profit for the quarter was Rs.428 crore up by 20 per cent year-on-year and revenues were Rs 2, 262 crore, up by 28 per cent year-on-year. Sequentially, profit and revenue dipped by 1.2 per cent and 2.2 per cent respectively over the previous quarter ending March 2005.

o Century Textiles & Industries has posted a 131.65 per cent rise in net profit at 
Rs. 46.10 crore for the quarter ended June 30, 2005 compared with Rs. 19.90 crore for the corresponding quarter in 2004.

o JK Papers has announced a 57 per cent jump in its net profit to Rs. 16.22 crores for the fourth quarter ending June, 30 2005 on the back of higher production and business margins. For the year ending June 2005 it recorded a net profit of Rs. 38.96 crore. 

o Castrol India reported a 5 per cent rise in net profit at Rs. 49.5 crore for the quarter ended June 30, 2005 compared to Rs. 47.1 crore for the corresponding quarter in 2004. The board of directors has decided to pay an interim dividend of Rs. 4 per equity share.

o Pune based IT consulting company KPIT Cummins has posted a consolidated net profit of Rs.6.4 crore for the first quarter ended June 30, 2005 against Rs. 6.2 crore in the same quarter of previous fiscal year. 

o Personal products major Godrej consumer products reported a 57 per cent jump in net profit to Rs.27.1 crore for the quarter ended June 30, 2005 helped by a robust growth in soap brands and higher sales of personal care products such as hair colour.

o Profit on the sale of fleet has helped Essar Shipping to post a 263 per cent increase in quarterly net profit at Rs.110.4 crore for the quarter ended June, 30 2005 compared to Rs.30.4 crore for the corresponding period in the previous year.

o Hero Honda Motors Limited announced a net profit of Rs. 204.45 crore for the quarter ended June 30, 2005 compared with Rs. 190.07 crore for the quarter ended June 30, 2004 a rise of 7.56 per cent.

CREDIT RATING

o Care has upgraded the rating assigned to the non-convertible debenture issues of Hindustan Construction Co. Ltd. (HCC) aggregating to Rs.100 crore from AA to AA+. It has also retained the PR1+ rating assigned to HCC’s CP / STD programme of Rs.100 crore. These ratings factor in the company’s strong positioning in the construction sector, its dominant presence in high value contracts, robust growth in turnover, strong order book position and positive outlook for the construction industry. 

o In an another exercise, the agency has upgraded the rating assigned to outstanding non-convertible debentures issues (III, IV and V) of Gammon India Ltd. aggregating to Rs.140 crore from AA to AA+, while it has also reaffirmed the PR1+ rating assigned to the company’s CP programme of Rs.175 crore (enhanced from the earlier amount of Rs.130 crore) for a maturity up to one year. These ratings reflect the company’s long track record as well as its established position in the construction industry, proven engineering capabilities, strong order book position and positive outlook for the infrastructure sector. 

o Raipur Alloys and Steel Limited’s (RASL) proposed secured non-convertible debenture (NCD) issue of Rs.50 crore has being assigned an rating of A+ by Care. The rating takes into account the experience of the promoters in the steel industry, effective capacity utilisation, availability of power from associate company, higher capacity of sponge iron due to the successful completion of the expansion project, allotment of iron ore and coal mines by the Chhattisgarh Government, improved financial conditions in the financial year 2005 and current fortunes of the steel industry.

o Care has assigned AA and PR1+ ratings to Mercator Lines Limited (MLL) proposed secured redeemable non-convertible debenture (NCD) programme for an amount of Rs.600 crore and NCDs aggregating Rs.50 crore, respectively. It has also reaffirmed the AA rating assigned to the outstanding redeemable preference shares of Rs.40 crore. 

LABOUR

o Almost after two months, the Employees Provident Fund Organisation (EPFO) board of trustees approved a 9.5 per cent rate of interest for the year 2004-05. However, the Finance Ministry has yet to approve the decision. The Finance Minister had agreed earlier to the 9.5 per cent interest rate due to pressure from the left. The Central Board of Trustees (CBT) had subsequently agreed to the proposal even though it would mean that the EPFO would have to use its own reserves to bridge up the gap of Rs. 716.07 crore deficit. The payment of a 9.5 per cent interest rate to subscribers for 2004-05 will probably entail an outgo of Rs. 6885.05 crore as compared to interest earnings of only Rs. 6168.98 crore. The proposal was then sent to the Finance Ministry after which the Finance Ministry had asked the CBT to reconsider the rate of interest of 9.5 per cent.
 

Theme of the week:

Infrastructure Development : A New Approach *

I
Backdrop of Inadequate Investment Demand

On the face of it, the overall industrial growth scenario appears to show signs of an uptrend. After experiencing distinct and persistent recessionary conditions for as long a period as eight years 1996-97 to 2003-04, industrial investment and output began to look up in the last fiscal year 2004-05 and the uptrend seems to have continued since then. The index of industrial production (1993-94=100) increased by 8.2 per cent during 2004-05 and the latest data for April-May 2005 shows a growth rate of 9.6 per cent. This uptrend is attributable to the major manufacturing sub-group, which has experienced a growth rate of 9.0 per cent during 2004-05 (April-March) followed by 10.5 per cent during April-May 2005.

The manufacturing growth in turn has been contributed by improved performances by the capital goods and consumer durables sectors. Capital goods industries have shown an average output growth of 12.6 per cent during 2004-05 and of as much as 18.9 per cent during April-May 2005. Like-wise, consumer durables output has experienced reasonably high growth of 14.0 per cent and 19.2 per cent during the above periods, respectively. There have also been signs of an uptrend in industrial investment as revealed by the Industrial Entrepreneurs Memorandum (IEMs) which have registered increases of 29.9 per cent and 25.2 per cent, respectively, in terms of amounts in 2003 and 2004. Similarly, the actual investment from out of the IEMs, after showing absolute declines in 2002 and 2003, showed an increase of 33.4 per cent in 2004.

Even so, it cannot be said that, as yet, the improvements in industrial output and investment are widespread and capable of being enduring in nature. The current signs of improvement appear to be, to a great extent, the result of some selective and sectoral improvements as in some metal industries, cement, textiles, IT, bio-chemicals and a few other chemical industries, and automobile parts. Many consumer durables industries have shown increases as recovery of the lost ground for many years.

Broadly, any accelerated growth momentum in Indian industry does not appear to be feasible because the contractionary features of public policies pursued since the beginning of the 1990s are by and large persisting. A massive squeeze on public sector investment and investment in physical infrastructure in particular and a sharp deterioration in the share of development expenditure in the government’s total expenditure, have all combined to constrain the growth process.

The step-up in non-food bank credit expansion in the recent period may give the impression that the virtuous cycle of increased bank credit leading to increased output and industrial investment has begun. This may well be true, as the Reserve Bank of India’s latest data presented in Table 1 suggest.

Nevertheless, a critical evaluation of the performance of the industrial economy suggests that infrastructure bottlenecks are emerging as a serious constraint in expanding manufacturing activities. At the same time, the RBI governor’s latest policy statement argues that “the overhang of liquidity continues to remain substantial at about Rs 100,000 crore”. The effective statutory liquidity ratio (SLR) has no doubt declined from 42.3 per cent at the end of March 2005 to 36.3 per cent but nevertheless, it continues to remain above the statutory minimum SLR of 25 per cent. The objective of this note is to bring out the possibilities of deploying the surfeit of liquidity in the financial system in a ‘supply-leading’ strategy and that too for the badly needed railways development and other physical infrastructures in the new environment of administrative and financial reforms.

II
A Phase of Growth Through the Infrastructure Route

A strong reason for proposing the revival of manufacturing activity through the infrastructures route lies in the fact that the manufacturing sector in India is undergoing metamorphic changes. A sharp reduction in investment demand arising from compressions in public expenditure programmes and in public investment, has been accompanied by an acute system of competition from abroad including selective threats of mergers and acquisitions. The obsolete nature of technology nursed by the manufacturing firms is combined with excess capacities built in the past based on expectations of continued expansions in public expenditure programmes and public investment. 

Against such a background, the manufacturing firms are in the process of substantial restructuring. Therefore, investible funds available with banks and financial institutions have limited takers amongst the manufacturing firms, except a few industries, despite the RBI’s concerted efforts to produce an environment of relatively low interest rates. This does not mean that banks and FIs have no role to play in the recovery process; they do have an important role in that they can correct the distortions that have been created in the distribution of bank credit in the 1990s as a response to stricter capital adequacy norms and other aspects of financial sector reforms. The entire credit delivery system has exhibited a gross sense of insensitivity to the credit needs, particularly of small-scale and medium enterprises in manufacturing industries. But, in the present scenario, any effort to correct this may help in the recovery process only to a limited extent.

III
Triggering An Enduring Revival

As hinted earlier, there are certain segments of the Indian economy which are crying for attention, and in the present context of infrastructure shortages, any effort in that direction would also serve as an answer to many a problem faced by the economy as a whole. After a review of the successive five-year plan programmes and the sectoral backlogs, we have singled out five sectors for concentrated and massive thrust in investment: they are the railways, the power sector, the irrigation programmes, ports, and road development – the areas which have a pent-up demand and the beneficial effects of which in the form of forward and backward linkages would be immeasurably high. 

The proposition advanced here is that the present situation calls for a decisive expansionary public policy, but this cannot be attained with the help of the government’s budgetary programmes at the central or state or their combined levels. A decisive thrust in development programmes has become beyond the scope of their fiscal health. Therefore, the best answer to the present development requirements has to be found outside the budgetary programmes. Taking into account the current and prospective size and nature of sources and uses of funds in the financial system including external flows, it is our considered judgment that it would be feasible to line up the required investible resources for such an investment thrust. The implied proposition again is that in the matrices of resource availability and the economy’s absorptive capacity, it is possible – and also advisable with the objective of a more efficient use of available resources – to superimpose on the already planned deployment of resources, an additional investment expenditure of Rs 15,000-16,000 crore per annum or Rs 75,000-80,000 crore for the next five-year period, distributed over the five key infrastructure areas identified above. 

It is necessary to recognise that the economic calculus associated with a forced but productive expenditure of about Rs 15,000-Rs 16,000 crore per year in successive years is such that it is sure to pull up the entire macroeconomic perspective set out in the Mid-Term Appraisal of the Tenth Five-Year Plan (2002-2007). If such additional investment does take place, domestic saving, investment and tax to GDP ratios are all sure to be bolstered up in the next five years. 

In the above respect, three important issues that are required to be clarified are: (i) what would happen to the internal consistency in sectoral balances when a few sectors are forced to absorb substantial additional investible resources; (ii) what are the inflationary implications of such an expansionary public policy; and (iii) is the economy capable of absorbing such additional financial resources and translating them to concrete physical investment? 

Our responses to these questions for the present are in the form of a brief caricature presentation. First, on the question of inter-sectoral consistencies, it would be useful to disabuse ourselves of any such consistency that has ever been attained in the final outcome of five-year plans in the past. Five-year plans in the recent period have been constructed on models “integrating the models of Harrod-Domar type and the Leontief input-output system in a demand-supply frame relating growth with investment. Thus we had a plan model which integrated macroeconomic parameters with the consistency requirements at a more disaggregated level of inter-sectoral relationships. The model has undergone some variations overtime. More variables have been endogenised in successive plans” [Planning Commission 1995]. This was the technical position of the Eighth Plan and the same has been true of the Ninth Five-Year Plan (1997-2002). What is more, “The planning model generates steady state growth paths between the terminal year of the perspective period and the base year in a manner which ensures both inter-sectoral consistency and consistency between the investment requirements and the availability of investible resources. Using constant sectoral incremental capital output ratios (ICORs) and constant sectoral employment elasticities, alternative growth paths can be evaluated in terms of their impact on the generation of work opportunities” [Planning Commission 1998: 30]. But, it should be recognised that the final outcome of any plan has hardly been consistent with such original plan models. We would cite any number of macro variables planned and achieved to buttress this contention. Interestingly, the Ninth and Tenth Plan documents have made explicit recognition of the difficulties involved in any deterministic relationship. To quote the Ninth Plan (p 23): “The most important characteristic of the methodology adopted in the formulation of the Ninth Plan is that it is not based on a deterministic relationship between the Plan and economic performance. It is explicitly recognised that there are uncertainties in the system and limitations in the ability of the planning system to accurately predict future trends. Furthermore, it is also recognised that the effects of government policies and interventions are not entirely predictable” [Planning Commission 1998: 23]. 

It does not mean, it must be conceded, that such high levels of investment devoted to a few sectors will not create any inter-sectoral imbalances. Far from it. But, in the present scenario of increasing market-orientation of the economy, as the Ninth and Tenth Plans have envisaged, the market forces will have to resolve the emerging imbalances. The role for public institutions and public policies will involve the identification of the emerging trends and evolving of policy measures to resolve the possible imbalances. 
On the question of inflationary implications, it is necessary for the macroeconomic theorists and practitioners to recognise that the old linkages between money, output and prices are no more valid in the face of higher imports and threat of more imports in an open economy. Secondly, there are no supply shortages experienced in foodgrains and other primary products, which is likely to be the situation for some years to come. Thirdly, a major source of inflation in the recent past has been the increases in the petroleum prices. The proposed goal of doing away with the administered price mechanism may tend to add to inflation, but the economy will have to make to do with somewhat higher prices for petroleum products. 

Finally, on the question of the absorptive capacity, answers have to be sector-specific as the issues involved are much more complex. Apart from the mobilisation of real resources, there are issues of project planning and organisational preparedness. A few general points can nevertheless be made in defence of the strategic quantum jump in investment that we are proposing in the railways and other infrastructure areas. First, the bulk of the additional demand so generated would be in areas such as railway equipments, metal-based industries and basic metals, in all of which there is substantial excess capacity. The output of the transport equipment industry has suffered a severe setback in the 1990s (except for the automobile sector). Almost all items of finished steel have been facing severe under-utilisation of capacity. Secondly, there would be substantial demand for skilled and unskilled labour, which should be warmly welcomed in the present context of niggardly non-farm employment growth. A caveat should, however, be entered in this respect which concerns the presence of excessive staff in the railways and such other organisations; the initiation of new projects should give an opportunity to redeploy the managerial and project staff for the purpose. As for the projects themselves, almost all of them can be pulled out from the respective ministry’s shelf including various technical reports. 

IV
Sound Basis in Strategy of Unbalanced Growth

At this stage, we may step back a little and see if such an approach would have support from economic theory. It seems to us that such a concentrated approach to investment can be easily found in what has come to be known as the strategy of ‘unbalanced growth’. We are convinced that anxiety on the part of the planners in India, particularly after the Fourth Five-Year Plan 1969-74 (that is, after the second half of the 1960s), to satisfy different sectoral demands, had made the spread of resources rather thinly over different sectors. The end-result has been a massive backlog of achievements in sectors after sectors, in plan after plan, as a result of the insufficiency of investible funds. Even the plan model with its fetish for inter-sectoral balances combined with the application of consistencies in macroeconomic parameters based on deterministic relationships, has contributed to the suboptimal performances repeatedly now for over two decades. The worst to suffer in this respect has been the infrastructure sectors like the railways, power (for want of investments even in balancing equipments), irrigation and road development. In this context, a perceptive observation made by Paul Streeten (1963) four decades ago sounds so valid; he had said that under unbalanced growth, the active sectors pull the others with them, while in balanced growth, the passive sectors drag the active ones back. 

It may be clarified in parenthesis that the generation of internal resources by the institutions and government organisations managing these infrastructural areas has no doubt been meagre and hence their fresh investment programmes have suffered. But, it is necessary to appreciate that this is a vicious circle arising also from the supply shortages in basic infrastructure, and hence high unit costs (fixed as well as variable) which give, to an extent, the impression that the user cost realisations by the above agencies have been unduly uneconomic. We admit at once that this is not a case against appropriate increases in tariffs and fares and other user charges, or against minimisation of distortions, say in the case of the railways, between freight tariffs and passenger fares. As explained in a subsequent paragraph, the fresh investment programmes should have in-built conditionalities on the phased increases in user charges a la the World Bank. 

Any detailed survey and review of the relevant theoretical issues is, also, beyond the scope of this note. We may briefly set out, however, the broad strands of theoretical arguments buttressing the present proposal. First, supply-leading phenomenon of financial development, embedded in the philosophy behind bank nationalisation, has been considerably diluted in the 1990s. ‘Supply-leading’ approach envisages two functions for the system of financial intermedation: “to transfer resources from traditional (non-growth) sectors to modern sectors, and to promote and stimulate an entrepreneurial response in these modern sectors” [Patrick 1966]. As has been emphasised in literature, financial intermediation which transfers resources from traditional sectors by credit creation and forced saving, “is akin to the Schumpeterian concept of innovation financing” [Patrick 1966]. In our judgment, the discarding in India of the ‘supply-leading’ philosophy in the financial sector in the 1990s has harmed the development process; it has in particular spawned a situation of in-optimal use of the available financial savings in the economy. 

Secondly, the most forceful reason for advocating concentrated investment programmes in the railways and other physical infrastructures is their possible backward and forward linkages. In this respect, the following observations made by Albert Hirschman (1984:96) are indeed apt: 

If a popularity contest were held for the various propositions I advanced in Strategy, the idea of favouring industries with strong backward and forward linkages would surely receive first prize. The linkage concept has achieved the ultimate success: it is by now so much part of the language of development economics that its procreator is most commonly no longer mentioned when it is being invoked. 
A major battle I fought in Strategy was against the then widely alleged need for a ‘balanced’ or ‘big push’ industrialisation effort; that is, against the idea that industrialisation could be successful only if it were undertaken as a large-scale effort, carefully planned on many fronts simultaneously.

V
Expanded Programme for the Railways

One of the greatest failures in India’s planning process has been the inadequate attention paid to an all-round development of the Indian railways. All critical reviews of the railways’ performance, including the five-year plan documents and the railways’ own reports, repeatedly bemoan the persistent erosion in its share in the economy’s total traffic – from 89 per cent in 1951 to 40 per cent in 1995 in respect of freight traffic and from 68 per cent to 20 per cent in passenger traffic. The economy and the people at large seek to survive in the absence of planned infrastructure; in that light the increased share of the road transport system is an extremely haphazard systemic response to the failure of planning. The high social costs paid in the form of increasing “congestion, pollution, high accident rates and conspicuously inequitous sharing of public utility of the road system” [Planning Commission 1998: 841], in Mumbai and the other major metropolitan centres, is a glaring example of the adverse repercussions which have already reached crisis proportions. 

What is proposed here is that the government and the Reserve Bank of India should let the railways (through its financing subsidiaries like the Konkan Railway Corporation and the Indian Railway Finance Corporation) raise, through commercial bond issues, an additional amount of say, about Rs 8,000 crore per year for the next five years. This is being suggested particularly in the context of many railway line projects like the Maharashtra Urban Transport Project (MUTP – II) in Mumbai, a model scheme of seamless multi-model urban transport system in Andhra Pradesh, and certain identified urban railway projects in Karnataka; they are unlikely to take off the ground unless substantial additional resources are mobilised for them. To quote the Ninth Five-Year Plan (1997-2002) precisely in the context of the MUTP-II project, “since the transport projects in the metropolitan cities require very large investment, external assistance could also be mobilised for completing the work in a reasonable period” (p 841). Or to quote the Plan in a more general context, “Along with the rest of the transport system, the railways have been seriously underfunded in recent Plan periods and the budgetary support has been woefully short of their needs” (ibid: 838). 

The position taken hitherto has been that “market borrowings are not suitable for financing an infrastructure sector like the railways beyond a point. Their high cost and service burden cripple the enterprise, which has several social obligations” (ibid). This seems to us is a somewhat narrow view of the financial possibilities. The exploitation of more dynamic financing arrangements will of course require some vision. The suggestion in this note is that the Planning Commission be made the focal point for administering the additional bonds financing programme in collaboration with the Reserve Bank of India (RBI). As the World Bank does with regard to project financing in individual countries, the Planning Commission and the RBI evolve a system of conditionalities attached to the use of additional bonds financing from the market; fulfilment of these conditionalities should help appropriately service the bonds by internal generation of resources. These conditionalities have already been set out in the Tenth Five-Year Plan. The most important requirement would be for the railway ministry to agree, even if in a phased manner, to eliminate policy distortions and to accomplish the badly needed reforms in the management of the system. To enumerate a few of them: 
(i) Corrections to the skewed tariff policy which overcharges freight movement in order to subsidise ordinary passenger traffic; (ii) pursuit of an investment strategy which places enough emphasis on expanding railway capacity in areas where there is potential commercial traffic; and (iii) the entire railway system should be run on commercial accounting principles, and eventually, towards that end, the Indian railways should itself be corporatised instead of being run as a government department. 

A major difference would be that there would be the facility of a substantially higher amount of resources for implementing specific projects in a time-bound manner. 

As for the availability of commercially viable projects for immediate implementation, there is no dearth of them. The railways may begin with the MUTP-II for Mumbai, and other metropolitan transport projects cited above. Secondly, as the Tenth Plan Approach Paper proposes, they may seek to augment capacity on the saturated high density corridors, particularly on the golden quadrilateral by undertaking doubling, opening up of alternative routes through new lines, gauge conversion, and improving safety devices. 

It should be emphasised that what is being proposed here is that the Planning Commission and the RBI together agree to provide about Rs 8,000 crore of additional funds – in addition to the normal plan and investment programmes – to the railways so that they hasten the implementation of shelf-based projects which would go a long way in augmenting the badly needed urban as well as nationwide transport infrastructure in the country, as also in correcting the distortions that have set in it.

VI
Additional Bonds-Financed Investment

The balance of the estimated Rs 15,000-Rs 16,000 crore of additional bond issues may go to finance three other infrastructure areas specified above, namely, power (Rs 3,000-4,000 crore), irrigation (Rs 3,000 crore), ports (Rs. 1000 crore), and road development (Rs 1,000 crore) each year. It is necessary to recognise that in each one of them state governments will have a larger role to play and hence the enforcement of discipline such as the appropriate recovery of user charges – which are an essential ingredient of the bonds financing programmes – may turn out to be more complex. But, state governments are increasingly realising the importance of the reform process, and with such devices as the escrow accounts for specific projects and memoranda of understanding, the Planning Commission and the RBI may achieve, even if slowly, some success in enforcing better financial discipline in each of the sectors chosen for accelerated development programmes. It is better that such a congenial environment is used for expanding the investment horizon in the economy. 

Irrigation Programmes 

Insofar as investment programme visualised for irrigation development in the next five-year plan is concerned, there are very significant suggestive observations in the Tenth Plan Approach Paper. They are: 

Public investment in irrigation has fallen significantly over successive Plan periods. This is largely due to resource constraints faced by governments both at the centre and the states...The Tenth Plan must aim at a major revival of public investment in irrigation capacity and water management. The Accelerated Irrigation Benefit Programme is a potentially important instrument for providing resources to state governments in support of ongoing irrigation schemes. Allocations under this programme need to be massively increased.

The five-year plan documents have thus repeatedly emphasised the question of funding shortages including the suspension of World Bank support as important causes for the shortfall in capacity addition in irrigation. The Ninth Plan had also brought out how, for want of resources, “only a few new major and medium projects were taken up and greater emphasis was laid on the completion of ongoing projects as a first charge on the available resources” (p 553). Against this background, it should be possible to hasten the implementation of some of the important major and medium projects. In this regard, it is relieving to note that the state governments have already established a tradition of market borrowing for irrigation projects on a sizeable scale. 

As for the improved collection of irrigation charges, the Planning Commission has been seized of this matter since the early 1990s after the appointment of a Water Pricing Committee in 1991. Its recommendations along with the recommendations of an officials group which examined the above committee report suggested that “full O and M cost should be recovered in the phased manner, i e, over a five-year period starting from 1995-96 taking into account the inflation also and that subsequently after achieving O and M level the individual states might review the status to decide on appropriate action to enhance the water rates to cover 1 per cent of the capital cost also. In addition to the above, the setting up of Irrigation and Water Pricing Boards by all the states and mandatory periodic revision of water rates at least every five years with an opportunity for users to present their views were also recommended. Further, the group also recommended the formation of water users’ associations and the transfer of the maintenance and management of irrigation system to them so that each system may manage its own finances both for O and M and eventually for expansion/improvement of facilities. During Ninth Plan, all the states will be persuaded to implement the recommendations of the Water Pricing Committee” (ibid, p 541). 

Thus, comprehensive water pricing reforms are envisaged, and with the bait of additional funds earmarked for the purpose, it should be possible for the Planning Commission and the RBI to have operations and maintenance costs (O and M) as also the proposed 1 per cent of the capital cost recovered as water rates. 

Apart from the major and medium projects, some parts of the additional funds may be set aside for the implementation of the minor irrigation programme in which institutional finance as it is plays an important role. During the Eighth Plan period for which data are available, the bulk (71 per cent) of the total institutional investment (Rs 5,331 crore) was absorbed by four states, namely, Andhra Pradesh, Maharashtra, UP and Tamil Nadu. There is substantial scope for goading other states to catch up in this respect. The NABARD may be permitted to issue special bonds for facilitating its refinancing facilities as at present to banking institutions for providing in turn credit to state-level institutions engaged in promoting minor irrigation programmes. 

Power Sector Development 

The power sector development has turned out to be one of the most problematic areas. The annual losses of State Electricity Boards (SEBs) estimated at Rs 24,000 crore at the end of 2001-02 and the consequential outstanding dues to the connected central public sector undertakings (CPUs) projected at Rs 35,000 crore, uneconomic power tariffs for agriculture and household consumers with cross-subsidisation by the industry and commercial users, transmission and distribution (T and D) losses officially estimated at as much as 24 per cent for the economy as a whole but in some cases T and D losses actually found to be as much as 45-50 per cent, and the actual collection of only 80 per cent of the billed electricity charges due to operational inefficiencies – all these have been endemic and stark realities of the power sector. What is more, SEBs’ operational inefficiencies in power generation have accumulated over years as a result of the shortage of funds earmarked for balancing equipments and for technological upgradation. 

Recent five-year plan documents has a series of ideas for the power sector reforms, such as regularisation of power tariffs, unbundling of SEBs into separate generation, transmission and distribution as distinct activities (including their corporatisation and privatisation) and 100 per cent metering and other distribution reforms. The Tenth Plan Draft Approach Paper had also proposed that: “as states embark on power sector reforms it will be necessary to deal with the problems of the very large outstanding dues of SEBs and also the medium-term restructuring of the SEBs to bring about viability in operations over a 3- to 4-year period. Substantial financial resources will be needed to help states make the transition. The Accelerated Power Development Programme (APDP) introduced in the Ninth Plan needs to be greatly expanded to serve as a vehicle for assisting states willing to undertake power sector reforms.” 

Assuring that the above-mentioned conditionalities can be enforced by the Planning Commission, the provision of additional funds based on commercial borrowings outside the agreed plan programmes for important power projects at the central and state levels, appears to be a viable proposition. 

Also, in specific programmatic terms, there are two areas which have the potential for absorbing additional bond-financed funds, namely, an impetus to the development of hydroelectric power, which has considerably lagged behind over the years with its share in the total generation getting reduced to 24 per cent from over 40 per cent a few years ago. Recognisedly, hydro-electric power has a number of advantages such as the avoidance of carbon emissions and suitability for dealing with situations of peaking deficits in thermal plants; also, it is an area in which India has a comparative advantage in the form of large untapped hydro resources. It is generally agreed that private initiative in the hydro-electricity area would be limited, and therefore, additional financial support for such institutions as the Power Finance Corporation (PFC) and the National Hydro-Power Corporation (NHPC) should help to promote additional investment in the area. This can be done only if the concerned corporations are in a position to evolve project proposals with appropriate escrow accounts for the recovery and repayment of institutional funds at agreed intervals.

Road Transport Programme 

A primary objective of the proposals contained in this note is to provide an added thrust to capital expenditure in the economy. The road development project seems to have received considerable impetus after the initiation of a National Highways Development Project in 1995 for which a Central Road Fund has been created by ensuring assured user charges in the form of cess on petrol and high-speed diesel, some parts of which are also being earmarked for the rural road development programme. The Tenth Plan Approach Paper has already accorded top priority to the road sector: “Completion of the ongoing work on the Golden Quadrilateral and the related north-south corridor projects must have top priority in the Tenth Plan”. 

While considerable progress is thus being achieved in the national highways programme, the system of state highways and major district roads “has remained relatively stagnant both in respect of length as well as traffic carrying capacity” [Planning Commission 1998]. But, it is unlikely that any substantial borrowed funds at commercial rates could be deployed for this activity. Also, as for the rural connectivity, the Tenth Plan proposes to achieve linking up of all villages with all-weather roads through the prime minister’s Gram Sadak Yojana. 

There is, however, a specific area where additional investment deserves to be planned, that is, in the form of fleet acquisition by the State Road Transport Corporations (SRTCs). The replacement of over-aged buses has been an important programme in this area, but the success seems to have been lukewarm. In this regard, Housing and Urban Development Corporation (HUDCO) has been supporting the SRTCs in fleet augmentation. 

The Tenth Plan document has placed the total fleet strength “at 1.15 lakh with a total capital investment of Rs. 8,200 crore (Tenth Plan, pp. 960-961) as at the end of March 2001. Net acquisitions thereafter has been fewer as net additions of 200 or odd buses had almost stopped in 1994-95. A study made by the Planning Commission some years ago had revealed that the vehicle productivity was largely the outcome of its age profile. SRTCs with very high percentage of over-aged fleet faced frequent breakdowns resulting in lower vehicle productivity. 

The vehicle acquisition programme suffered a setback after budgetary support to public sector undertakings began to be phased out in terms of the Eighth Plan objective: “Planning Commission has also decided not to allow state governments to contribute Plan funds to their respective SRTCs for expansion of fleet. Consequently, requirement of funds for “capital contribution to SRTCs” will be much less compared to the plan outlay” (p 263) [Mid-Term Eighth Plan]. The capital contribution to the SRTCs was practically withdrawn thereafter. Also, the objective of promoting private sector investment on a sizeable scale has not succeeded, resulting in serious urban, as also overall, constraints in transport facilities. 

The facts presented about suggest that at least over 10 per cent of the fleet or about Rs 1,000 crore worth of additional resources would be required for fleet acquisition by the SRTCs, which could be made available through such institutions as HUDCO subject to the respective SRTCs fulfilling the following conditions specified in the Ninth Plan Mid-Term Appraisal: “replacement of over-aged buses, improvement in the productivity and management practices together with timely and adequate increases in fares, reduction in bus staff ratio and reimbursement of concessions by state governments”. Only such a definitive situation of policy and operational reforms would make the commercial lendings viable for the SRTCs. 

Ports

As for ports, again, the Tenth Five Year Plan states that “in respect of major ports, there has been a heavy shortfall in expenditure as compared to the outlay during the ninth plan” (p.966). The corporatisation of major ports under the Major Port Trusts Amendment Act 2001 as well as the proposed private-public sector participation should go a long way in speeding up the additional investment programmes.

Summary

As for the financing possibilities, a rough and ready projection of the sources and uses of funds in banking system allows for the provision of additional bonds financing to the extent of Rs 15,000-16,000 crore per annum for the next five years for the purposes of infrastructural development proposed above. There may, however, be seasonal stresses and strains in the money market as a result, which the RBI can mitigate, as at present, by suitable injection of liquidity. In fact, the RBI may even think of supplying additional liquidity through specially designed refinance and rediscount facilities which, as perceived above, are unlikely to have inflationary implications.

Notes

[*This is an updated version of a note published in Economic and Political Weekly of July 28, 2001] 

1 The Strategy refers to Hirschman’s The Strategy of Economic Development, Yale University, 1958. 
2 As the Planning Commission (2001) has noted, “some reduction in share in favour of road transport was to be expected and is in line with trends elsewhere but in India this has been unusually excessive.

References

Hirschman, Albert O (1984): ‘A Dissenter’s Confession: ‘The Strategy of Economic Development’ Revisited’ in Pioneers in Development (A World Bank Publication), April. 

Patrick, Hugh T (1966): ‘Financial Development and Economic Growth in Underdeveloped Countries’, Economic Development and Cultural Change, January. 

Planning Commission (1995a): A Study on the Performance of State Road Transport Undertakings, September. 

– (1995b): A Technical Note to the Eighth Plan of India (1992-97), May. 

– (1996): Draft Mid-Term Appraisal of the Eighth Five-Year Plan (1992-97), September. 

– (1998): Ninth Five-Year Plan 1997-2002, Vols I and II, March. 

– (2000): Mid-Term Appraisal of the Ninth Five-Year Plan (1997-2002), Highlights, October. 

– (2001): Draft Approach Paper to the Tenth Five-Year Plan (2002-2007), May 1. 

Streeten, Paul (1963): ‘Balanced versus Unbalanced Growth’, The Economic Weekly, April 20.

*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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