Introduction

International trade, according to its proponents, plays a positive role in influencing many economic activities and in turn promotes economic progress of the participating country. Adam Smith, David Ricardo, J.S Mill, Alfred Marshall and D.H Robertson were some of the leading supporters of free trade as a means of promoting economic development. D.H Robertson argued that trade is an ‘engine of growth’. His argument was based on the transmission of positive effects from one country to another, particularly from developed to less developed countries. Advanced economies with high growth rates and expanding manufacturing sector were expected to raise their demand for primary goods, in turn raising demand for exports from less developed countries (less developed economies were traditionally known to export primary goods). Increased demand for their exportable were expected to accelerate growth of less developed countries. Technology, skill and capital were expected to flow from developed nations to less developed economies with the expansion of trade. These positive benefits of trade were expected to lead to a virtuous link between developed and newly developing economies.

With fears of external dominance, the Indian planners adopted a somewhat introvert external trade (and external investment) strategy. Far from viewing foreign trade as an engine of growth, Indian planners sought to minimise import demand by adopting an import substitution policy and gave secondary place to exports primarily as a source to generate the foreign exchange earnings to meet that part of the import bill not covered by external assistance. There were controls over both imports and exports. However, the early 1990s saw a metamorphic change in perception towards the external sector and its role in overall development, which resulted in radical liberalisation of foreign trade policies.

Trends in Merchandise Trade

The year 1991 was marked with external sector crisis. Among other problems of crisis dimensions faced by the country during that year, India was left with foreign reserves barely enough to cover a weeks imports. To tide over the problem, among other measures trade reforms were introduced. The focus of these reforms was on liberalisation, openness, and transparency and the thrust was shifted from import substitution to export promotion. Responding to the policy measures, India ’s foreign trade began exhibiting considerable buoyancy during the period 1993-94 to 1995-96. However, the growth in foreign trade decelerated for the next three years that is from 1996-97 to 1998-99. Structural constraints operating on demand as well as supply side of our exports contributed to a slowdown or decline in exports during the same period. The recessionary conditions due to east-Asian crisis in July 1997, which spread across other emerging market economies, resulted in unfavourable international trading. A reduction in global demand due to recessionary tendencies led to a substantial reduction in world trade and in turn a contraction in our imports and exports. After a healthy export growth of 20.8 per cent in 1995-96, the rate of growth came down to 5.3 per cent, 4.6 per cent and -5.1 per cent in the next three years until 1998-99. An economic contraction in East Asian economies resulted in a decline in their import demand. Since Asia accounts for one-fifth of India ’s total exports, our country could not escape the downward impact on exports of a low demand from these countries. Imports also witnessed a downturn during 1996-97 to 1998-99 although on a relatively lower scale. From a sharp growth of 28 per cent in 1995-96, the imports growth slowed down to 6.7 per cent in 1996-97, to 6.0 in 1997-98 and further to 2.2 in 1998-99 (see Table A and Table B). The deceleration in 1998-99 was contributed mainly by a decline in the oil import bill, attributed to softening of international oil prices and decline in imports of non-ferrous metals, iron and steel and machinery, all reflective of a weak domestic demand and a slowdown in industrial activity

India’s foreign trade looked up in the next two years only to face another downturn in 2001-02, (Tables 1 and 2) arising out of a deceleration in the global economic activity. The year 2001-02 was marked by an economic slowdown in major industrial countries and also in east Asia. World trade prices also declined for both fuel and non-fuel commodities. These recessionary conditions combined with the adverse impact of September 11, 2001 attack created unfavourable conditions for world trade in general. Its impact was also observed on Indian merchandise trade performance, with exports registering a decline of 0.6 per cent (Table 2) and imports registering a very low growth of 2.9 per cent (Table 3).

Since 2002-03, India ’s export have been witnessing a robust growth and exhibiting a tendency of moving on to a higher growth trajectory. After a dismal performance in 2001-02, as mentioned above exports witnessed a sharp recovery in 2002-03 and the trend of strengthened growth was maintained in 2003-04 and 2004-05. In fact, during the fiscal year 2004-05, exports have surpassed the annual target of $74 billion and touched $79.2 billion, thus achieving a record growth of 24.1 per cent (in US dollar terms). This is not only higher than 21.1 per cent growth achieved during 2003-04 but also higher than the export growth rate target originally set at 16 per cent for 2004-05. Imports have also registered a massive rise of 37 per cent, driven up partly by an upsurge in international crude oil prices and partly by strong resumption of domestic investment demand.

Both external and domestic factors have contributed to the satisfactory performance of exports since 2002-03. Improved global growth and recovery in world trade have aided the strengthening of Indian exports. On the other hand, firming up of domestic economic activity, especially in the manufacturing sector, provided a strong base for sector-specific exports. India ’s export performance during 2004-05 was also influenced by continued trade promotion and trade facilitation efforts of the government.

The ratio of exports to GDP has increased from 7.2 per cent in 1992-93 to 11.5 per cent in 2004-05 and that of imports to GDP has galloped from 8.5 per cent to 15.5 per cent. During the decade of the 1990 (excluding the year 1990-91), the ratio of exports to GDP was at an average of 8.2 per cent, which has increased to 10.2 per cent in just five years of the new millennium. Similarly, the average ratio of imports to GDP has increased from 9.7 per cent to 12.4 per cent during the same period. India ’s total merchandise trade, which is an indicator of the degree of openness of the economy, has increased substantially from 15.6 per cent of GDP in 1992-93 to 19.3 per cent in 1999-00 and further to 27 per cent of GDP in 2004-05 (Table 1).

Table 1: Various Ratios
	Exports in	Imports in	GDP at current	Export to	Import to	Total of	Trade to
	Rs Crore	Rs Crore	market prices	GDP ratio	GDP ratio	Import and	GDP ratio
			in Rs Crore			exports

2004-05	356069	481064	3105512	11.5	15.5	837133	27.0
2003-04	293367	359108	2760025	10.6	13.0	652474	23.6
2002-03	255137	297206	2463324	10.4	12.1	552343	22.4
2001-02	209018	245201	2271984	9.2	10.8	454219	20.0
2000-01	201357	228307	2089500	9.6	10.9	429663	20.6
1999-00	159095	215529	1936831	8.2	11.1	374624	19.3
1998-99	139752	178332	1740985	8.0	10.2	318084	18.3
1997-98	130100	154176	1522547	8.5	10.1	284276	18.7
1996-97	118817	138920	1368208	8.7	10.2	257737	18.8
1995-96	106353	122678	1188012	9.0	10.3	229032	19.3
1994-95	82673	89971	1012770	8.2	8.9	172644	17.0
1993-94	69749	73101	859220	8.1	8.5	142850	16.6
1992-93	53688	63375	748367	7.2	8.5	117063	15.6
Source: Export-Import data from DGCI&S and GDP data from CSO, 2005

India ’s export share in world trade has increased perceptibly during the recent period. this share was at about 2.0 per cent in 1950-51 but had steadily declined to 0.52 per cent by the early 1990s. since then there has been an increase. It has thus moved up to around 0.84 per cent during 2004 from 0.52 per cent in 1990. Nonetheless India ’s share in world exports is still very low and looks very unimpressive when compared with other major trading Asian countries, such as, China and other East Asian economies like Malaysia , Thailand , Singapore , Korea and Indonesia . Currently India is 31^st leading exporter and 24^th leading importer in world merchandise trade. The Ministry of Commerce and Industry, Government of India has set an export target of 1 per cent share of world exports by 2006-07.

Changes in the Commodity-wise Composition of Trade

Exports

Over the years the commodity composition of India ’s export basket has changed in favour of technology intensive and industrial products such as, engineering goods, besides high-value agricultural products. India has gradually transformed from a predominantly primary products exporting country into an exporter of manufactured goods. Aided by various export promotion measures, the share of ‘manufactured goods’ in India’s total exports peaked in 1999-00 to 80.9 per cent (its share has hovered between 73.4 per cent and 77.9 per cent). Among manufactured products, gems and jewellery, chemicals and related products and engineering goods are the major items, which have contributed to the overall rise in share. Over the years, the share of gems and jewellery in total exports has remained somewhat stable but its growth has fluctuated. In 2004-05,the gems and jewellery segment has recorded its highest growth of 29.6 per cent since 1993-94 (30.1 per cent). Exports of gold jewellery form a major part of India ’s total export under gems and jewellery segment. Not only the shares of chemicals and related products and engineering goods have gone up but also they have been major contributors to the export growth in recent years. A rise in exports of engineering goods highlights the strength of the manufacturing sector.

The share of agriculture and allied products has displayed a declining trend. From a peak of 13.7 per cent in 1996-97, it has come down to 7.6 per cent in 2004-05. However, exports of processed agricultural products has shown a marked improvement in recent years.

The share of traditional export items such as tea, coffee, handicrafts and carpet has declined. In recent years, India has been facing stiff competition from Pakistan , Bangladesh and Sri Lanka in the market for carpets. Share of textile exports, which has been India ’s forte, has also witnessed a steady decline from a high of 25.1 per cent in 1998-99 to 15.2 per cent in 2004-05. This could have been because of emergence of China as one of the major textile exporter country.

Exports of petroleum products have also increased in the recent years. The share of petroleum products has gone up remarkably from a miniscule 0.1 per cent in 1999-00 to 8.6 per cent in 2004-05. Export earnings from petroleum products has also witnessed a healthy growth due to high international oil prices as deterred by the low earnings in domestic sales (from past 2 years), oil companies have been exporting instead of selling their products in domestic market.

Ores and minerals is another commodity group whose share in total exports has also risen, over the years.

As mentioned earlier, 2000-01; the year of global recession which compressed the world trade, has been marked by a decline in value of exports and this decline has been spread across both the agricultural and manufactured commodity groups. Most of the commodity groups have registered a substantial slowdown in their growth and some of the groups have registered a decline.

Imports

The commodity structure of India ’s imports has also shown marked changes. Although the share of oil imports in total imports has seen fluctuations, the volume of such imports has grown significantly on account of increased domestic consumption. A high growth of 45.1 per cent in imports of petroleum crude and products during 2004-05 and 97.1 per cent in 1999-00 can be attributed to high global oil prices prevailing during the years in question.

Imports of capital goods, namely, machinery, electronic goods, project goods, registered a sharp rise in the initial reform years but exhibited a declining trend thereafter from 1996-97 to 2000-01. Again, as mentioned earlier, this period was related with lack of investment demand associated with sluggish pace of domestic activity arising out of a slowdown in the global economy. However, a turnaround in the global as well as domestic economy thereafter has resulted in a rise of such imports.

Growth in the import of iron and steel has also moved in tandem with the global and domestic economic activity (although its share in total exports has declined over the years). A high growth rate in iron and steel imports is indicative of a rise in manufacturing activity in the country Of late, a pick-up in domestic industrial activity has resulted in higher demand for metalliferous ores and metal scrap, which are important raw materials for the steel industry.

Imports have also been driven by an increase in the imports of mainly export-related items like pearls, precious and semi-precious stones and electronic goods. India has emerged as a major hub for processing these precious and semi-precious stones due to low labour costs.

Reflecting the impact of a series of policy measures undertaken in the post-reform years starting with the repeal of Gold Control Order in 1991 for liberalising the imports of gold and silver, these imports showed a sharp rise. India has always remained a country with the largest consumption of gold in the world – generally about 25 per cent of the total. After the liberalisation, particularly after the permission granted to banks to import gold in 1997-98, the quantum of gold imports plus clandestine inflows has shot up to over 800 tonnes per year. As a Gold Council study (2004) states, “ India saw an enormous leap in its gold consumption after liberalisation from 200 tonnes to between 500 and 600 tonnes a year, subsequent to official deregulation from 1990 onwards. In 2003 India took 569 tonnes – against China ’s 208 tonnes.” And now for 2004-05, official imports have worked out to about 770 tonnes. Gold import has also been promoted by the unduly low level of import duty. In January 1999, the duty was raised from Rs 250 to Rs 400 per 10 grams. Due to tremendous trader pressure, it was again reduced to Rs 250 in February 2001 and further to Rs 100 in February 2003. As the country does not produce any gold, the entire requirement is imported and its share in total imports has risen from 8.3 per cent in 1999-00 to 9.6 per cent in 2004-05.

As pointed out by Reserve Bank of India (RBI), there exists a significant divergence between the merchandise transactions, particularly on imports, as compiled by Director General of Commercial Intelligence and Statistics (DGCI&S) and the RBI. This divergence is revealed by customs data gathered by DGCI&S and the balance of payments data published by the RBI (Table 4). One source of divergence arises out of difference in timing and valuation; custom data is based on the shipment of goods and the booking, where as RBI data is based on payment basis. Apart from this difference, a major cause for the difference is that the customs data do not cover import of defence stores including defence equipment, while the RBI data cover the same as and when these imports are paid for. Besides, RBI data have a lead in payments in regard to imports under external assistance and commercial borrowings as the RBI records them when the payments are made to suppliers while the DGCI&S data cover them when goods arrive in the country.

Table 4: Comparison of DGCI&S and RBI Data
(US Dollar million)
	Export		Export		Difference	Import		Import		Difference
	DGCI&S		RBI			DGCI&S		RBI
1992-93	18537		18869			21882		24316
1993-94	22237	20.0	22683	20.2	-446	23306	6.5	26739	10.0	-3433
1994-95	26330	18.4	26855	18.4	-525	28654	22.9	35904	34.3	-7250
1995-96	31795	20.8	32311	20.3	-516	36675	28.0	43670	21.6	-6995
1996-97	33470	5.3	34133	5.6	-663	39132	6.7	48948	12.1	-9816
1997-98	35006	4.6	35680	4.5	-674	41484	6.0	51187	4.6	-9703
1998-99	33218	-5.1	34298	-3.9	-1080	42388	2.2	47544	-7.1	-5156
1999-00	36715	10.5	37542	9.5	-827	49738	17.3	55383	16.5	-5645
2000-01	44076	20.0	44894	19.6	-818	49975	0.5	59264	7.0	-9289
2001-02	43827	-0.6	44915	0.0	-1088	51414	2.9	57618	-2.8	-6204
2002-03	52719	20.3	52512	16.9	207	61412	19.4	65422	13.5	-4010
2003-04	63843	21.1	64723	23.3	-880	78150	27.3	80177	22.6	-2027
2004-05	79247	24.1	80832	24.9	-1585	107066	37.0	118961	48.4	-11895
Notes: Figure in italics are growth rates in percentage over the previous period
Source: DGCI&S and Economic Survey, (various issues)

As the data in Table 4 show, the difference between the two sources has got widened. Also, the growth rate calculated on the basis of these two sets of data differs

and for some years this difference is quite substantial. For example, for 1998-99 and 2001-02 as per DGCI&S custom data growth in imports is low but positive, whereas, as per RBIs BOP data, there has occurred a decline in their growth rate.

Table 5 gives various ratios as calculated in Table 1 but only for 5 years, just to make a point on disparity in the data. It is clear from the two tables that these ratios differ as the ratios given in Table 1 are based on DGCI&S data whereas ratios given in Table 5 are based on the RBI data.

Authenticity of DGCI&S Data: Rise of a Controversy

There has arisen a controversy regarding the authenticity of the DGCI&S data after a startling revelation by an internal investigation conducted by the Commerce Department, detecting irregularities in the manner in which India ’s foreign trade data are being compiled. The investigation reveals that 36 per cent of exports have been wrongly classified and quantity of 41 per cent of the export consignment data captured at ports has been wrongly reported. Similar problems have also been found in reporting import data where 11 per cent of imports have been wrongly classified and in as much as 46 per cent cases, the quantity has been wrongly reported. This poses a serious problem especially for policy makers, who rely on this data for formulating policies. One could very well have a situation where focus is put on a wrong sector based on this erroneous data.

India

’s export-import trade has begun to show considerable dynamism. There has developed some virtuosity between the two, with the rise in import-content of exports. Secondly, the changing structure of India ’s exports across commodity groups provides evidence of the underlying shift in the production structure and rising levels of competitiveness and productivity. The export basket is well-diversified, ranging from products from the low value addition chain to items with high technology content. According to the United Nations Conference on Trade and Development (UNCTAD), India is among the top ten exporters in as many as 32 commodities out of 70 leading export items from developing economies. The share of these commodities in aggregate world exports is about 22 per cent and these 32 commodities account for about 60 per cent of India ’s total exports.

With the amendments made in the current law on agriculture and marketing by the Central Government, almost all the states are set to amend the relevant Agricultural Produce Marketing Committee (APMC) Act by March 2006. While the present APMC undertakes direct marketing to corporates and setting up of farmers / consumer markets, the new consensus redefines the APMC Act by promoting alterative marketing system and contract farming. This would mean direct purchasing of the commodities at market-defined prices by trading houses and corporates from farmers either through individual purchase contracts or from farmer/consumer markets.

Marine exports from the country registered a 9.2 per cent increase in quantity and a 12.5 per cent rise in value terms for the first quarter of this fiscal year. As per the provisional figures available with Marine Products Export Development Authority (MPEDA), total export during April-June 2005 stood at 85,925 tonnes worth Rs. 1409 crore compared to 78,669 tonnes worth Rs. 1252 crore during the same period last year. Exports to Japan and European Union went up while that to the US and South East Asia region witnessed a fall. The fall in exports to US had been affected owing to the anti-dumping duty on Shrimps.

According to RBI annual report 2004-2005 agriculture and allied activities have contributed 1.1 per cent to real GDP growth during financial year 2004-05. This is a drastic drop in contribution compared to 9.6 per cent in 2003-04. Kharif production fell by 12 per cent while Rabi production surged by 4 per cent during financial year 2004-05 over the previous year. Overall agricultural index has registered a decline of 1.2 per cent. The total foodgrains production during 2004-2005 was estimated at 205 million tonnes, 4 per cent lower from the previous year.

While agricultural production has declined, milk production has moved up by 3.3 per cent reflecting a more stable expansion of dairying activities. With the production of 91 million tonnes during 2004-05, India is the world’s largest producer of milk.

INFRASTRUCTURE

Electricity

The power ministry is set to launch a Partnership for Excellence Programme from September 2005, wherein performing utilities such as National Thermal Power Corporation (NTPC), Andhra Pradesh Generation Company (APGenco), Karnataka Power Company Limited (KPCL) and Rajasthan Generation Company (RGenco) would help 26 power stations across the country, with Plant Load Factor (PLF) below 60 per cent, to improve PLF and consequently improve power availability.

Non-Conventional Energy

Grid interactive wind power generation projects, which are largely commercial projects through private sector investment, will be granted preferential tariffs in potential states by the central government. A total of 211 sites have been identified in 13 states and union territories for setting up wind power projects. By June 2005 India 's installed capacity from wind power projects has reached 3740 MW and present exploitable potential is estimated at 14500 MW.

Coal

In order to win captive mining blocks of coal, companies producing power, cement and iron and steel may have to go through a competitive bidding process as outlined in the New Exploration and Licensing Policy for the petroleum sector, without the government showing any bias for Coal India Limited.

Petroleum and Petroleum Products

US crude futures touched a record peak of $ 7.80 a barrel, the highest price since NYMEX began trading contracts in 1983, as one of the biggest hurricanes in US history, Katrina, disrupted oil and gas production in Gulf of Mexico, home to around 1.5 million barrels per day of US crude, amounting to a quarter of total US oil and gas production.

According to ONGC, about 60 per cent of the production at Bombay High, post the devastating fire on 27^th August, has been restored and is expected to reach near normal by March 2006.

The decision on expected hike in petroleum products would be taken only after September 6, with petrol prices likely to be raised in the range of Rs 2-2.50 a litre, diesel prices by around Rs 2 and LPG is hike expected to be around Rs 10.

According to an Assocham study, hard times will continue for the global and domestic petroleum industry as a surge in crude prices will continue grow with supplies further tightening and prices soaring above $90 a barrel in the near future. It estimates increasingly shrinking production to stagnate at 2 million barrel a day from the existing 3 million barrel a day with most oil and natural gas basins aging and generating lesser production than their prime time, particularly in north America and north-western Europe, which account for 60 per cent of current oil and natural gas production and where more then 50 per cent of the reserves have been extracted.

Steel

After witnessing a downward trend for last three months domestic steel prices have shot up once again on the back of hardening international prices and rising demand; the domestic primary producers, who had reduced steel prices in June, July and August between Rs 500 to Rs 2000 per tonne, have hiked prices by Rs 500 to Rs 1000 per tonne.

Government is going ahead with plans to consolidate steel capacities available in the public sector by merging smaller companies with Steel Authority of India Limited (SAIL).

Government has decided to form a group of ministers to finalise action plans and monitor implementation of the yet to be announced National Steel Policy, headed by the steel minister and having representation from mine and coal ministries.

Roads

Ministry of roads, highways and shipping has invited private investors for phase IIIA of NHDP, which involves four-laning of 10000 km of national highways. The total investment is estimated at Rs 55000 crore, with around Rs 30000 crore required from private investors under the BOT model and the rest of the amount being made available through viability gap funding. The minister has invited ADB for participation and has suggested to the bank the adoption of a programme based lending approach instead of the project-based approach currently used by them.

Pharmaceuticals

The government is planning to put in place a Settlement Commission to resolve cases against pharma companies for alleged violation of pricing norms; the government is currently seeking paybacks in excess of Rs 900 crore from them, Rs 465 crore worth outstanding demands from National Pharmaceutical Pricing Authority and Rs 450 crore long pending claims by the government under the Drug Price Equalisation Account.

Chemicals

The paint industry in India is worth Rs 7740 crore comprising Rs 5400 crore in the organised sector, which in turn consists of Rs 4150 crore of the decorative segment and Rs 1250 crore of the industrial paint segment.

The paints industry may raise prices by at least 5 per cent by September-October 2005, in the wake of input prices of petroleum based solvents like mineral oil turpentine growing at 7 per cent. The hike is being resisted due to present high volume growth, intense competition in decorative segment and possible entry of foreign companies into the segment.

Textiles

Textile manufacturers, on massive expansion drives post abolition of export quotas, are importing machinery, due to inability of domestic textile machinery sector to meet their demand in terms of both quality and quantity. An estimated Rs 2000 crore worth of machinery has been imported in the last 18 months.

Automobiles

The government is planning an overhaul of the tax structure for automobiles so as to give a fillip to manufacturing of small cars and discourage use of old commercial vehicles.

The Kazakhstan government has refused to support a rebid by India ’s Oil and Natural Gas Corporation for acquiring Petrokazakhstan. The Petrokazakhstan board has already accepted the offer made by China Natural Petroleum Corporation International.

The excise and customs department has given Reliance Industries a month to pay the Rs 9,500 crore unpaid dues, for which a showcause notice has been issued to the company.

Welspun India , the flagship company of the Welspun group, has announced an expansion plan of Rs 650 crore to enhance production capacities of towels, bed sheets and spinning facilities. The funds for expansion would be mobilised through loans, sale of equity shares and internal accumulation.

Jai Prakash associates has won Rs 1,925 crore irrigation project in Andhra Pradesh. The project will be completed with in the next five years.

Bajaj Hindustan has decided to buy 55 per cent stock in Pratappur Sugar at Rs 55 per share.

The Cabinet Committee on Economic Affairs has approved the sale of 8 per cent government equity in Maruti Udyog Limited to public sector banks and financial institutions.

Grasim Cement of the AV Birla group has approached the heavy industry department with a proposal to buy Cement Corporation of India ’s Nayagaon plant in Madhya Pradesh.

Bharti Tele-Ventures will invest Rs 1500 crore in 2005-06 for expanding its broadband and fixed lines services.

Pantaloon Retail (India) and Liberty Shoes have decided to set up a 51:49 joint venture company to launch a chain of footwear stores across the country.

Chennai-based BPO firm, Lason India has entered into an alliance with JSW Steel limited to set up a BPO unit in Bellary district of Karnataka.

Indian Oil Corporation is bidding to acquire a 51 per cent majority stake in the Tupras refinery, the largest refinery in Turkey . Tupras has an 86 per cent share of refining in Turkey .

Reliance Industries Limited has increased polymers and polyester prices between one per cent to seven per cent. The price rise will be effective from September 1, 2005.

The Aditya Birla group’s cement production for April-August 2005 has increased by 10.4 per cent at 114.1 lakh metric tonne as compared to 103.5 lakh metric tonne during the same period earlier year.

The Oil and Natural Gas Corporation (ONGC) has decided to set up an export oriented oil refinery and a special economic zone with an investment of Rs 7,000 crore at Kakinada .

Canara Bank has reduced its interest rates on loans to teachers to 10.75 per cent from the existing 12 per cent on the occasion of Teacher’s day on September 3, 2005. The reduced rates will be offered during the entire month of September to all teaching and non-teaching staff of schools, colleges and universities.

The Reserve Bank of India (RBI) has modified the structure of fees paid for government business to banks. According to the new norm, banks will be paid fees on the basis of the number of transactions and not on the amount of business. Earlier, banks used to get paid 11.80 paise per Rs.100 of government business done. Under the revised framework, banks will be at a rate of Rs.60 for pension payment and Rs.45 for others. Various government business handled by banks include pension payments, collection of taxes, soliciting and servicing of relief and savings bonds, public provident funds and senior citizen saving scheme. According to bankers, this will drastically bring down the income on government business handled by the banks and affect their profitability. The State Bank of India corners more than 50 per cent of the total government business. Some of the major private banks active in this segment are UTI Bank, HDFC Bank and ICICI Bank.

Housing Development Finance Corporation Ltd. (HDFC) has raised $500 million through zero coupon foreign currency convertible bonds (FCCBs) with a tenure of five years. HDFC’s FCCB issue is the first after the government relaxed external commercial borrowing norms (ECBs) in June 2005. The government had allowed housing finance companies to raise funds abroad through issue of FCCBs.

Infosys Technologies has bought the world’s largest group life insurance policy from Life Insurance Corporation of India (LIC) for a sum assured of around Rs.6,000 crore. LIC will be reinsuring this group cover with Swiss Re due to the huge amount of sum assured. Infosys has had a group policy with LIC for several years. However, this year, the software company decided to hike the sum assured several-fold. The cover ranges from Rs.10 lakh to Rs.40 lakh, with the sum insured increasing with seniority. At the same time, the employee head count has increased considerably to 38,000. As a result, the sum insured has augmented more than four times, from Rs.1,300 crore a couple of years ago, to close to Rs.6,000 crore. However, Infosys will have to pay the fringe benefit tax on the premium, since the benefit of this policy flows directly to employees.

Hyderabad-based $4.4 million Virinchi Technologies Ltd., a provider of web-enabled enterprise-wide solutions, has entered into an agreement to acquire KSoft Systems Inc. for $2.66 million in a cash-stock deal. KSoft is a $3.7 million company that provides enterprise business solutions focusing on SAP implementation and business intelligence. With this acquisition, KSoft will become wholly owned subsidiary of Virinchi.

IT major Tata Consultancy Services (TCS) has completed implementation of core banking solutions (CBS) in over 4,000 branches in State Bank of India and its seven subsidiaries. Going by the number of branches covered, this is the largest CBS project in the world. The implementation was spread over all circles of the bank, covering major urban and semi-urban centres of the country and is one of the fastest rollouts in the world.

TCS has won a major consulting project from Bank Negara Indonesia (BNI), Indonesia ’s third largest bank. TCS will be implementing the Malcolm Baldridge criteria for performance excellence framework for BNI.

The Talbros Automative ComponentsLtd issue which opened on September 1 to September 9 has been oversubscribed.

The continued FII as well as mutual funds purchases has propelled the stock indices higher into the unprecendented territory. the BSE sensex touched an all-time high of 7928 before closing for the week at 7899 at a gain of 2.86 per cent over the previous week’s close. Similarly, NSE nifty rebounded 2.5 per cent to 2415 points. The bullishness in the market is not restricted to the large cap but also to the mid and small cap stocks. Moreover, the liquidity flows to the mid-cap and small cap has been more than that to the large cap. While BSE sensex has gained 2.86 per cent over the previous week, BSE mid-cap and small-cap have gained 3.64 per cent and 5.56 per cent, respectively.

For the whole month of August, the FIIs have been net buyers of equities to the extent of Rs 5051 crore with purchases of Rs 27,837 crore and sales of Rs 22,786 crore, while in debt they have been net sellers to the extent of Rs 430 crore with purchase of Rs 521 crore and sales of Rs 951 crore. In the first eight months of the calendar year, FIIs net investment in equities has been Rs 32,854 crore and in dollar terms, it is $ 7,527 million.

For the entire month of August, the mutual funds have been net buyers of equities to the extent of Rs 2,293 crore with purchases of Rs 9,282 crore and sales of Rs 6,989 crore.

The Sebi initiated an inquiry into nearly 1,000 re-listed companies in the current calendar year across all exchanges.

In order to facilitate execution of bulk deals, the stock exchanges are being permitted to provide a separate trading window. A trade, with a minimum quantity of 5,00,000 shares or minimum value of Rs.5 crore executed through a single transaction on this separate window of the stock exchange will constitute a “block deal”. The said window will be kept open for trading for a limited time period of 35 minutes from the beginning of trading hours i.e. from 9.55 a.m. to 10.30 a.m. A single block deal order in this window has to be for a minimum quantity of 5 lakh shares or minimum value of Rs 5 crore. Also orders may be placed in this window at a price not exceeding ± 1 % from the ruling market price / previous day closing price. Every trade executed in this window must result in delivery and shall not be squared off or reversed. Disclosure of all trades in this window and its dissemination to general public has been mandated.

As part of the corporatisation and demutualisation initiative, the stock exchanges that were set up as Association of Persons will have to incorporate a for-profit company limited by shares and demutualise. The exchanges which were set up as companies limited by guarantee will have to convert / re-register themselves to companies limited by shares and demutualise, while the stock exchanges that are already companies limited by share will have to only demutualise. Thus Sebi has issued orders for 10 stock exchanges which include the Calcutta Stock Exchange Association Limited, the Delhi Stock Exchange Association Ltd, and others.

The total derivatives turnover during the week ranged between Rs 12,269 crore and Rs 13,809 crore. The stock futures turnover ranged between Rs 6,576 crore and Rs 8,601 crore.

The government is to re-issue 5.69 per cent 2018 for a notified amount of Rs 5,000 crore and is also to re-issue a fresh 30-year security for a notified amount of Rs 3,000 crore on September 8.

In order to mop up the sloshing liquidity in the system, the RBI has enhanced the notified amount of 91-day treasury bills under MSS from Rs 1,500 crore to Rs 3,500 crore each for all the auction to be held between August 31 and September 28.

With the international oil prices touching an all-time high of $70.85 due to the impact of Hurricane Katrina in the United States , the market sentiments remained cautious. However, the liquidity in the domestic market remained comfortable with the reverse repo bids being tendered in excess of Rs 24,000 crore daily during the week.

Collateralised Borrowing and Lending Obligation (CBLO) segment clocked the highest volume of Rs 15,082 crore with the highest number of trades 302 on September 1.

The weighted average YTM of 8.07 per cent 2017 has edged down marginally from7.21 per cent on August 26 to 7.18 per cent on September 2.

With the sharp surge in global oil prices, the rupee depreciated and touched a low of Rs 44.12 on September 1, but rose to Rs 43.95 on September 2.

The six-month forward premia fell from 0.64 per cent on August 26 to 0.45 per cent on September 2.

The NCDEXAGRI index has risen from 1251.15 on August 26 to 1263.32 on September3.

INFLATION

The annual point-to-point inflation rate based on wholesale price index has declined to 3.08 per cent during the week ended August 20, 2005 from 3.13 per cent registered during the previous week. The inflation rate was at 8.46 per cent in the corresponding week last year.

The WPI in the week under review has risen marginally by 0.1 per cent to 194.3 from the previous week’s level of 194.1 (Base: 1993-94=100). The index of primary articles’ group has increased by 0.2 per cent to 191.6 from the previous week’s level of 191.3, mainly due to an increase in the price indices of food articles. The higher prices of food articles have been evident due to the higher prices of fruits and vegetables, condiments and spices and gram. The index of fuel, power, light and lubricants group has also risen marginally to 304 from the previous week’s level of 303.9, mainly due to higher prices of furnace oil. The heavy-weighted manufactured products’ group constituting 63.7 per cent of total weight, has also increased a tad by 0.1 per cent to 170.7 from 170.5 of the previous week’s level.

The latest final index of WPI for the week ended June 25, 2005 has been revised upwards; as a result both, the absolute index and the implied inflation rate moved up to 194.2 and 4.30 per cent instead of the provisional levels of 193.9 and 4.14 per cent, respectively.

The contained rate of inflation during last two months, i.e. June and July including the first three weeks of August is attributed mainly to the high base effect. The recent hike in the prices of petroleum products by the government, which was effective from September 6^th, may fuel inflationary pressures on the economy in the near future through its cascading effects on the related sectors like transport.

According to the chairman of the interim Pension Fund Regulatory and Development Authority (PFRDA), the Public Provident Fund (PPF) as a post-retirement saving scheme, will have no utility once the New Pension Scheme (NPS) comes into force. He further added that the government might think of phasing it out within next two to four years. According to the Rakesh Mohan Committee report on the administered interest rates and rationalisation of savings instruments, which was formed on January 24this year, it is desirable to continue the same in its present form for some time, since PPF is a longer-term savings scheme providing old-age security to the unorganised sector.

The Pension Fund Regulatory and Development Authority (PFRDA) would be finalising the draft regulation for pension funds in next ten days. The draft regulation would cover the issues like number of pension fund managers, central record-keeping agencies, base minimum capital requirement for pension fund managers and possible charges that could be levied by them. According to the Chairman of interim PFRDA, the base minimum capital for pension fund managers should be less than that of insurance companies and should be fixed at less than Rs. 100 crore. He added that PFRDA is not in favour of putting a cap on the number of pension fund managers. On the contrary, there could be several public fund managers like LIC, PNB and SBI, which have acquired expertise to operate in this field. He indicated that the pension sector FDI can be kept at the level of 26 per cent, as fixed for the insurance sector. The PFRDA Bill would be tabled in the parliament in November during the winter session.

The revenue department in its explanatory note has clarified that medical reimbursement up to Rs. 15,000 for treatment in an unapproved hospital would attract fringe benefit tax. Further, it has also stated that employee stock options have been excluded from FBT ambit along with gratuity and provident fund contributions. The note also clarified that food, beverages, tour and travel and boarding and lodging expanses for in-house training sessions would fall under the ambit of FBT. While, non-profit universities and hospitals, charitable trusts and law firms having retainer-relationship arrangements are not liable to pay FBT. The note also clarified that while provisions for double taxation avoidance agreements (DTAA) would not be allowed exemption from FBT, foreign companies with employees in India would be liable to pay FBT, though they can take credit for the payment under the DTAA.

Petroleum minister’s proposal to restore the price band mechanism for a change in petroleum prices has been rejected by the Finance Ministry on the grounds that it would lead to ad-hocism in fiscal policies, thereby having a serious macroeconomic consequence. Further, the Finance ministry also stated that it anticipated a shortfall of Rs. 3,628 crore in indirect tax collection from petroleum sector, targeted at Rs. 56,000 crore this year. Corporate tax from the refining, petrochemical and oil marketing sector during 2004-05 declined to Rs. 1,639 crore from the Rs. 3,842 crore in 2003-04, in wake of losses suffered by the oil companies.

Finance Minister has directed the Chief Commissioners of Customs and Excise to undertake measures to improve excise duty collections and take strict actions against the evaders. As per the data available with the finance ministry up to July 2005, only four excise zones- Ranchi , Kolkata, Mysore and Lucknow- have managed to mop up excise higher than the moving target up to the month. One of the reasons for the lower excise mop up is the higher availing of Cenvat of Rs. 5,8383 crore up to June due to increased exports.

The Federation of Indian Chambers of Commerce (Ficci) has urged the government to keep superannuation funds outside the purview of fringe benefit tax. Since including employees’ superannuation funds within the ambit of FBT is making the corporates to discontinue the scheme and take over the liability to pay pension without funding the same, which is undesirable in terms of employees social security.

The revenue department has increased the internal target for custom duty collections by Rs. 7,000 crore to Rs. 60,000 crore for 2005-06. The overall target of Rs. 1,92,215 crore from the indirect taxes for 2005-06 has also been increased internally by Rs. 5,000 crore, after factoring a shortfall of around Rs. 2,000 crore, owing to lower excise duty collections.

According to data release by Controller General of Accounts (CAG), fiscal deficit during April-July has risen to Rs. 77,480 crore, accounting for 51.3 per cent of the budgeted estimate, on increase in plan expenditure coupled with a near stagnant tax revenue. The deficit in the same period last year accounted for only 36.7 per cent of the budget estimate. The plan expenditure at Rs. 37,632 crore was 26.2 per cent of the budget estimate compared to 20.8 per cent in the corresponding period in the previous year.

CAG in its report for the year ended March 31,2004 has rapped the Goa government for its inept handling of the Dayanand Social Security Scheme. The findings of the survey agency appointed by the state government, revealed that out of 40,818 beneficiaries covered by the survey only 208,979 were genuine and that the pension paid to non-genuine beneficiaries amounted to Rs. 6.98 crore.

Icra has upgraded the ratings assigned to Sundaram Home Finance Ltd.’s (SHF) Rs. 500 million non-convertible debenture programme from ‘LAA-‘ to ‘LAA’. It has also upgraded the rating assigned to SHF’s fixed deposit programme to MAA from the existing MAA-. Both the upgradation takes into account SHF’s strong parentage, its ability to raise low cost funds from diverse sources, and improvement achieved in its asset quality through persistent initiatives.

Following Cadila Healthcare Limited’s (CHL) announcement that it will invest upto Rs. 400 million in the equity of a European biotech company, Crisil has reaffirmed the outstanding ratings assigned to CHL’s two non-convertible debenture issues of Rs. 600 million and Rs. 700 million at AA+/Stable, respectively. It has also reaffirmed the P1+ rating assigned to CHL’s Rs. 600 million commercial paper programme.

Crisil has assigned AAA/Stable and P1+ rating to Power Grid Corporation of India Limited’s (PGCIL) Rs. 20.00 billion bond programme and Rs. 6.50 billion short-term debt programme, respectively. Meanwhile, the agency has also reaffirmed the AAA/Stable rating assigned to PGCIL’s Rs. 7.50 billion bond programme. The ratings on PGCIL’s bonds programme continues to reflect PGCIL's critical role in inter-state power transmission in India , its track record of efficient operations as well as significant demand for transmission capacity

In an another exercise, Crisil has assigned AAA rating to Citicorp Finance Ltd.’s Rs. 5.5 billion non-convertible debenture programme, while it has also reaffirmed the AAA rating on the company’s Rs. 5 billion non-convertible debenture programme. The ratings reflects Citicorp Finance's good market position in the commercial vehicle (CV) financing business, its superior risk management systems and a diversified low cost resource base. In addition, the rating also factors in satisfactory gearing levels in the company’s asset financing business.

Meanwhile, Crisil has withdrawn the P+ (SO) rating assigned to the Rs. 1398.3 million Series A1 pass through certificates issued by UBL Trust Series 7 originated by IndusInd Bank Limited, as all the payouts under these instruments have been made out in full as scheduled.

A large number of developers of special economic zones (SEZ) have strongly demanded that the minimum area for sector specific single product or port/airport based SEZs should not be less than 500 hectares as otherwise.

A developer or a co-developer of a special economic zone may now have to hold at least 26 per cent stake in the entity proposing to create the basic infrastructure in the designated area. According to the draft SEZ rules, 2005, the government has also proposed that multi-product SEZs be spread across at least 1000 hectare, while the sector specific zones, including ports or airports, have a minimum area of 100 hectare. The SEZs for information technology and gems and jewellery may have an area of 10 hectares but the entire area should be used for developing the processing area.

The Jharkhand government has initiated the process for establishing a Special Economic Zone in Adityapur, near Jamshedpur .

India

has offered to allow up to 51 per cent foreign investment in insurance auxiliary services as part of its revised offers for service negotiations at the World Trade Organisation. This it has done while binding its commitment in insurance underwriting to 26 per cent. Also, India has said that foreign banks will not be denied a licence if the share of their total banking assets (on and off balance sheet) in India exceeds 25 per cent. This was 15 per cent in India ’s initial offer.

According to the study carried by Icrier, more FDI is needed in export-oriented industries to perk up the employment level in the organized sector. The study has been carried out to examine the impact of FDI, trade and technology on wages and employment in the Indian manufacturing industries in the post-reform period.

*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.