Current Economic Statistics and Review For the Week 
Ended September 17, 2005 (38^th Weekly Report of 2005)

I

Theme of the week:

Patterns in Social Sector Expenditure in Post-reform Period

            The objective of the present note is to address the question of the trends in social sector expenditure as well as its impact on human development in India in the post-liberalisation period. It becomes evident from the development literature that development cannot be measured through real economic indicators like gross domestic product or per capita income alone. Rather it manifests in a number of other dimensions such as human health, longevity and literacy – in other words, a certain level human development. The importance of human development through well-developed social infrastructure has been emphasised from time to time in the literature of economics of development. As the endogenous growth theorists propagate, emphasis on human development has to precede growth impulses. This is largely due to the realisation that economic growth does not automatically translate itself into better human development unless specific measures are taken in that direction (UNDP 2005). It is quite disquieting that despite India entering the high-growth trajectory, the UNDP Human Development Report, 2005 released recently has retained India’s human development index (HDI) at the same low level of 127 out of 177 countries as in the 2004 report. Even the countries like Pakistan and Bangladesh, which otherwise exhibit low level of economic development, have performed better than India in this respect. 

Broadly, the social sector is conceived as comprising social services and rural infrastructure. Social services mainly comprise of, 
(i) Education, 
(ii) Health and family welfare and, 
(iii) Water supply and Sanitation 

The performance of these indicators reflects real socio-economic development of a country. The development of these areas cannot be left to market forces. Therefore, it is vital that the government budgets allocate adequate funds to these key indicators in social sector. The long-term social sector expenditure trends do essentially reflect the extent of priority and importance given to the social sector as a whole. 

Social sector expenditure is of two types. First, there is expenditure that has broader objective of expanding social opportunities and improving the social indicators like education, health and nutritional standards of the general population and second, there are programmes that are primarily meant to alleviate poverty. The latter are rural development programmes (listed under ‘economic services’ in the budget classification), which relates mostly to poverty alleviation programmes. The most glaring feature of a social sector taken together is that it is a unique force, by which the benefits that accrue are tangible and can be reaped only in the long run. 

I
The Backdrop

The 1980s have rightly been described as the ‘decade of adjustment’ for a number of developing countries in Sub-Saharan Africa and Latin America. An unprecedented number of countries in these regions experienced severe balance of payments crises, which were sought to be overcome by resorting to loans from international monetary institutions like International Monetary Fund (IMF) and the World Bank. The short-run consequences of this lending were reductions in the growth rates of GNP and sharp increases in the countries’ debt service burden. The impact of such macroeconomic adjustment had been varied. While the low-income countries in Sub-Saharan Africa and Latin America had to substantially curb their social sector expenditures, the South East Asian countries like Malaysia and Indonesia could not only avert such cuts but, in fact, managed to increase their allocations for health and education. Even in the countries where the allocations were reduced, the poor had been protected by appropriate targeting of expenditures, a classic example of such action being that of Chile. Such a differential experience of these countries is probably due to the varied structural economic conditions, the macro-economic performance during the process of adjustment and the success in formulating and implementing appropriate policies to protect the vulnerable sections of the society. (Various sources for these observations see Prabhu, 1991)

Human Development in India during plan periods

In case of India, the elements of human development have always been a part of the planning process since its inception in 1951. The emphasis during the first plan (1951-56) was mainly on the programmes such as community development, primary education and provision of basic health facilities such as primary health centres. The thrust, however, could not be maintained in the subsequent two plans as the need for rapid industrialisation and growth took precedence over other goals. With niggardly growth experienced during the first fifteen years of planning, the issues of poverty and inequality came to the surface. The fourth plan (1969-74), therefore, focussed mainly on employment generation and removal of inequality of income and wealth. It was only in the fifth plan (1974-’79) that the Minimum Needs Programme (MNP) was finally incorporated into economic planning, with the provision of universal elementary education, minimum medical facilities, safe drinking water to certain poor villages and several other aspects concerning housing, electricity, transport and environment. Further, the sixth plan (1980-85) laid down minimum norms for the elements included in the MNP, besides adding adult education as an additional component. The main thrust of the seventh plan (1985-90) was on the implementation of the National Policy on Education (NPE), which was formulated in 1986. In addition to this, it also incorporated the National Health Policy in 1983 in order to meet the objective of health for all by 2000 AD. In pursuance of this policy, the National Literacy Mission was launched in 1988 with the aim of imparting functional literacy to 80 million illiterate people in the age group of 15-35 by the year 1995. Again the social sector was given a great deal of importance in the eighth plan (1992-97) with the priority sectors like employment generation, population control, literacy, education, health, drinking water and provision of adequate food, gaining in importance.

It is thus evident that there had been a number of efforts to develop social infrastructure in the course of economic development during different plan periods. No doubt, as a result, there have also been improvements in literacy rates, health conditions and life expectancy over several decades. The literacy rate of persons above 7 years of age increased from 16.6 per cent in 1951 to 52.2 per cent in 1991 and to 65.4 per cent in 2001, while life expectancy at birth increased from 32.1 years to 57.7 years in 1996 and to 62.6 years, respectively. Similarly, India has improved in her Human Development Index (HDI) rank at 127 for the year 2003 from 132 in the year 1997 roughly out of 177 countries (UNDP 2005). More significantly, the HDI itself has improved from 0.309 in 1990 to 0.602 in 2003 – a 94 per cent rise.

Despite substantial improvements, India’s performance with respect to social development has always been considered low and inadequate by international standards, especially as compared to its south and East Asian counterparts. Even the modest achievements recorded indicate only the average position and conceal the widespread regional as well as sectional disparities within the country. Furthermore, considerable intra-state disparities exist in the levels of social development. The poor levels of social attainment in the country may be attributed, among other factors, to the inadequate and distorted patterns of social sector expenditure. Therefore, the overall performance of social sector development has always remained passive without any impressive advances over a period of time. 

II
Social Sector Spending by Centre and State governments in the post-reform period

Combined Centre and State government Expenditure

In India, the social sector programmes and their implementation fall largely under the jurisdiction of the state governments. The Central government, however, supplements the states’ efforts by making additional resources available for specific programmes through centrally-sponsored schemes, additional central assistance and special central assistance. The combined social sector expenditure of the centre and state governments thus represents India’s commitment towards social sector development. While India has achieved significant improvements on the human development front with its HDI rank improving from 132 in 1997 to 127 in 2003, trends in combined expenditure on social services by the government between 1986-87 and 2004-05 indicate that the country has not conferred any additional importance to the sector (Table 1) 

The expenditure on social services and rural development together as percentage of GDP has disappointingly remained more or less stagnant at around 6.50 to 7.0 per cent over the period of 14 years from 1987-88 to 2001-02. Throughout the 1990s, the social sector expenditure in terms of percentage of GDP was lower than the share enjoyed just before the onset of reforms, which was 7.2 per cent in 1989-90. This level of expenditure was reached only in 2000-01 and 2001-02. Similarly, the expenditure on social sector has not shown any growth as a per cent of aggregate public expenditure during the same period; it has stubbornly remained at around 25 to 26 per cent. There was a brief period in mid 1990s, when it began looking up. It steadily improved from 25 per cent in 1994-95 to 26.6 per cent in 2001-02. Thereafter, the declining trend has again begun. In this scenario, the only alleviating factor is that the per capita real expenditure on social services and rural development has increased noticeably since 1993-94. It has increased from Rs. 623 in 1990-91 to 988 in 2000-01 (at 1993-94 prices) - an increase of 58.6 per cent in 10 years. 


Share of states in combined social sector expenditure

As mentioned above, the states contribute a lion’s share in the combined expenditure of centre and states. Table 2 shows that in 1990-91, the states’ share in the total social sector was at around 85 per cent and it was as high as 90 per cent with regard to rural development. The contribution of states, however, has declined for most of the major heads in the course of the 1990s.

There was a substantial decline in the states’ share of expenditure on rural development, which came down from 90 per cent in 1990-91 to just 61 per cent in 2000-01. Similarly, the states’ share of spending on family welfare and housing has also declined considerably during the same period. In spite of this decline, the states have continued to dominate in the combined social sector expenditures. This is because the states have their constitutional responsibilities for the two chief components of social sector, i.e. education and health. The states have accounted for approximately 89 per cent of the total expenditure incurred on both of these major heads in 2000-01. 

Inter-state disparities with respect of social sector expenditure

It is evident that there are considerable inter-state variations across 15 major states as far as social sector expenditure is concerned (Table 3). Among 15 major states, Rajasthan has shown a remarkable performance by surpassing West Bengal in its social allocation ratio between 1990-91 and 2000-01. It accounted for 41 per cent of the total expenditure on social services in 2000-01. The social allocation ratio is thus the highest in Rajasthan. In most of the states, the social services expenditure as per cent of total expenditure has either declined or only marginally improved over the period of decade (1990-91 to 2000-01) with the only exceptions being Rajasthan, Karnataka and Maharashtra. The states like Goa, Haryana, Punjab and UP had spent much lesser on social services as compared to other states in 2000-01. In the year 2003-04, the states like Kerala and Gujarat have proposed noticeable improvement in their social services expenditure. 

Apart from the top-spending state on social services namely, Rajasthan, the states like Bihar, Kerala and Tamil Nadu can be added to the list of states conferring importance to social sector, if expenditures on rural development are counted along with the social sector expenditures. In most states, the combined rural development and social services expenditures ratio are lower in 2000-01 than those a decade ago, but, again, with the exceptions like Bihar and Karnataka. There is significant decline in the combined expenditure of the states like Goa, Madhya Pradesh, Tamil Nadu, Uttar Pradesh and West Bengal. Although the combined social services and rural development ratio almost halved in Goa from 1990-91 to 2000-01, the absolute level of its social sector spending is still more than three times that of the weighted average of all 15 states. 

III
Expenditure on Key-Human Development Concerns 

Education

Education is perhaps the single most important means for individuals to improve their personal endowments, build capacity levels and in the process, widen sets of opportunities for a sustained improvement in one’s well-being. More importantly, it is a way of augmenting aggregate potentials towards the socio-economic development at macro level. The level and spread of education has posed as a major issue of concern in all the economies, especially in developing countries. 

The aggregate public expenditure on education as a percent of GDP at all-India level has increased only marginally from 3.9 per cent in 1990 to 4.1 per cent in 2000 (UNDP, 2003). This percentage is well below the international norm of 6 per cent of GDP on education. An overview of both central and state government expenditures on education indicate that the public expenditure on the sector was slightly less than 1 per cent of the GDP in 1951-52. Thereafter, it had shown an irregular rising and falling trends. It rose to 2.33 per cent in 1972-73 and to 3.07 per cent in 1979-80. It had slipped to 2.83 per cent in 1981-82. The expenditure on education as per cent of GDP in the post-reform period has been unfortunately disquieting. After declining from 3.8 per cent in 1991-92, it had either declined or remained stagnant until 1997. It was only since 1998-99, that it has shown some improvement, with the ratio reaching a level of 4.02 per cent in 2001-2002 (Table 4).

It is significant to note that the share of states in the total expenditure on education has declined to 87 per cent in 2003-04 from 90 per cent in 1990-91, (Ministry of Finance). 

Expenditure By Level of Education 

At a disaggregated level, the combined expenditure of the central and the state governments on elementary education was 1.78 per cent to the GDP in 1990-91. Thereafter, it had shown a gradual fall to 1.65 per cent in 1994-95, but in recent years, it has gradually risen to 2.02 per cent in 2001-02. The expenditure to GDP ratio on secondary/higher secondary shows an irregular behaviour with it varying between 1.13 and 1.44 per cent during 1997-98 to 1999-2000. The percentage ratio of expenditure on university and higher education to GDP, which was 0.77 per cent in 1990-91, had exhibited a gradual decline to 0.62 per cent during 1997-98, but it has risen marginally to 0.88 per cent in 2000-2001. This decline in the share of secondary, higher and technical education was on account of a shift in favour of elementary education, especially since the mid-1990s. 

Health 

The expenditure on health as per cent of GDP, which is already one of the lowest in the world, has almost remained stagnant at 1.3 per cent, now for a decade and a half, in 1990-91 up to 2004-05. As far as the states’ share in the total expenditure on health is concerned, it has stood at 89 per cent in 2003-04 as against only a marginally higher share of 91 per cent in 1990-91 (Ministry of Finance, 2003-04). 

Privatisation in health care 

The public expenditure on health remains a matter of concern at present. In the absence of adequate public health facilities, the dependency on private health care has increased over the last decade.

 Private health care has expanded tremendously, with the latest technologies and amenities. With the failure of public health care, even the poorer sections of the society rely on private provision leading to growing indebtedness along with a spurious quality of medical care for them. The private sector expenditure has risen from 74 per cent in 1991-92 to 85 per cent in 2002-03 of the total health expenditure (Table 6). 

While overall public health investment and expenditure have been low and inadequate to meet the healthcare needs of the population at large, there are disparities within this health sector spending. The most obvious disparity is the rural-urban dichotomy in public health investment and expenditure. Rural areas across the country have public health services that largely focus on preventive aspects. Thus, immunisation for children, antenatal care, surveillance of selected diseases and family planning services constitute the key focus of the primary healthcare system provided for rural India. The component for ambulatory curative services is grossly inadequate under the primary healthcare system. In contrast, the focus in urban healthcare is largely curative, with dispensaries and hospitals taking away most of the health resources. Since India lacks a national health accounting system, disaggregation of public spending across rural and urban areas and for the country as a whole, is difficult to discern. 

IV
International Comparison of Social Sector Expenditure 

Table 7 compares data on public expenditure allocation to education and health in India and a number of other developing and developed countries. Despite the higher total public expenditure to GDP ratio in India as compared with the averages of other groups, the share of public expenditure allocated to social services is much lower in India than in East Asian countries or in all developing countries.

The expenditure on education taken as a percentage of GDP or as a percentage of overall public expenditure was lower in India as compared to its Asian counterparts like Malaysia Korea and Thailand. The public health expenditure in India is also among the low-spending countries listed in Table 7. On the other hand, private expenditure on health estimated at 4.8 per cent of GDP for 2002 is reasonably higher in India than in many other countries, which emphasises on a gradual shift towards private healthcare services from those of public sector. This has necessitated a balance between public-private partnership with regard to health spending patterns, which could meet all the health-related requirements by ensuring affordability and quality. 

V
Current scenario of Social Sector Expenditure 

The present scene of social sector expenditure performance shows that despite the rhetoric goals set, the government has not been able to subserve the present and future societal requirements of the community as a whole. (Table 8) 

Expenditure on social sector as a percentage of total expenditure has been fallen from 21.1 per cent in 2001-02 to 19.3 per cent in 2004-05. Expenditure on education has shown a slippage from 10.4 per cent in 2001-02 to 9.4 per cent in 2004-05. Expenditure on health too has declined since 2001-02 from 4.7 per cent to 4.4 per cent in 2004-05. Even as a percentage of GDP, the expenditure on social sector has fallen from 6.3 per cent in 2000-01 to 5.6 per cent in 2004-05. 

Budget Allocations: 2005-06

One of the most glaring features of the Central Budget for 2005-06 is that the funds allocated for social sector (plan and non-plan) have added up to Rs. 64,671 crore, a provision that is 32 per cent higher than the expenditure during 2004-05 (RE). In absolute terms, this implies an additional allocation of Rs. 15,594 crore, which certainly represents a sharp increase. In case of some individual sectors, the mount is even higher; more than 55 per cent for elementary education, nutrition and child development; around 40-45 per cent in case of rural drinking water supply and tribal development. The central government in its National Common Minimum Programme (NCMP) has promised to give adequate attention to education in the country. The National Policy on Education (NPE) had set a goal of expenditure on education at 6 per cent of the GDP. On the other hand, two other sectors like women development and urban employment received allocations of 32 per cent and 23 per cent, respectively, that is, somewhat lower than the expenditure in 2004-05. It is however, important to note that the actual spending generally does not match the allocation figures due to under-utilisation of funds. Therefore, the concerned departments must be fully equipped to utilise the funds properly. Overall, the current budget seems to be more sensitive to human development issues with greater social sector allocations. 

But, again, there appears to be a catch which is that the states seem to have faltered in allocating funds for the social sector, partly also because of reduced overall central transfers (EPWRF 2005). This is reflected in data presented in Table 9, which has combined the central and states’ expenditures on social sectors. These show that the budgeted increase in the expenditure on social sector or that on social services has remained less than 10 per cent in 2005-06. As a result, whether as a percentage of GDP or as a share in total expenditure, expenditures on social sector or that on social services has remained almost static between 2004-05 and 2005-06. 

VI
An Overview of Social Sector Expenditure Trends

It is evident that, on the whole, the social sector spending trend growth rates for both, the centre as well as the state governments, were higher in the 1980s than in the 1990s. The trend growth rates for the centre are higher than the rates exhibited by the states. This means that the share of the states in overall (combined centre and states) social sector expenditure continues to shrink, indicating states’ increasing fiscal stress and a resultant declining commitment towards social sector development. Moreover, the level of social sector expenditure in India has been lower as compared to other developing countries, especially East Asian countries in 1990s. This shows that social sector is obviously not on the top of the priority list for most of our policy makers. The reform process has not witnessed any significant improvement in social sector spending as a whole; it has hovered around 20 per cent of the total expenditure in the post-reform period and as a percent of GDP, it has showed a marginal improvement to stand at 6.1 per cent in 2003-04 from 5.8 per cent in 1990-91. Therefore, there is an urgent need for stepping up social sector expenditure. 

Social Sector Expenditure Issues and Possible Remedies 

The most important issues to be addressed with respect to social sector spending are, funds utilisation and quality of expenditure. Under-spending generally takes place in non-plan expenditure, but it also sometimes takes place in plan expenditures. The underutilisation is mainly due to the time taken by the state governments to fulfil the criteria of new schemes and new procedures, unavailability of states’ complementary funds for some of the centrally-sponsored schemes and delays due to central bureaucracy with spill-over effects for the following years allocation, which is partly based on expenditure figures of the preceding year. Apart from these, some schemes presuppose local infrastructure to implement programmes. The funds, however, are not allocated even when such infrastructure is undeveloped. 

One of the other serious problems in the social sector spending is the high share of revenue expenditure, consisting mainly of salaries, while capital expenditure refers to spending on physical expenditure like building of schools, hospitals and medical technology. The share of revenue expenditure has gone up from 91 per cent of the total expenditure in 1986-87 to 95.5 per cent in 1999-2000, which shows the neglect of basic social infrastructure and the resultant poor outcomes. This implies that merely increasing allocations would not be able to do any value addition to the present situation of low human development. Therefore, the current pattern urgently calls for structural changes in the composition of social sector spending by enhancing capital expenditure on the sector. 
Considering the magnitude of the challenges that the country faces on the human development front, there is need to mobilise all available resources for meeting these challenges. No doubt, the budgetary allocations of the centre for the year 2005-06 have increased, but they have gone up only marginally as per cent of GDP: to 1.84 per cent from 1.72 per cent in 2002-03 and 1.59 per cent in 2004-05. On the other hand, the central government has an estimated spending at around 3.8 per cent of GDP on interest payments and 2.4 per cent on defence, which are quite higher than what the government would be spending on social sector in 2005-06. Certainly, social sector deserves a better deal. It is now a serious challenge in front of the government to improve social sector expenditure, both quantitatively as well as qualitatively. The Planning Commission and the central government should review the utility of all the centrally -sponsored schemes and pass on as many schemes as feasible, along with funds, to the states, as the first step of social sector reforms in the planning process. It should be the states’ responsibility to improve the efficiency of public expenditure in the social sector. The combined efforts by centre’s fiscal transfers to states and states’ efficient implementation of various programmes would result in better funds management and successful implementation of developmental programmes for the social sector. 

Highlights of  Current Economic Scene

AGRICULTURE   

• According to latest figures released by the Solvent Extractors’ Association (SEA), imports of edible oils including palm oil, Soya oil and Sunflower oil during the 10 months of current oil year (November 2004-October 2005) have increased by 27 per cent to 41.73 lakh tonnes from 32.95 lakh tonnes during the corresponding period a year ago. Edible oils’ imports in August were reported at 4.14 lakh tonnes, while crude oil imports were reported at 37.58 lakh tonnes. Imports of refined edible oil has decreased by 10 per cent, while that of crude oil has increased from 83 per cent to 90 per cent during the same period.

• The Indian government has banned raw sugar importers from selling the refined product in the domestic market. Now they will have to re-export the raw sugar after refining. For the year 2005-06, the government has permitted raw sugar importers to sell refined sugar in the open market and re-export the same amount within 24 months to meet domestic shortages. The re-export obligation from October 2005 will be on a grain-to-grain basis and not on tonne-to-tonne basis.

• Preliminary crop production estimates released by the Agriculture Ministry reckon the output of foodgrains in the current kharif to go up by about 2 per cent, while that of most commercial crops, barring Sugarcane, to fall marginally. Sugarcane production is projected to rise by around 10.9 per cent. The production of oilseeds and cotton is projected to drop by 6.5 per cent and 2.5 per cent respectively and that of pulses to rise marginally by 0.6 per cent.

o       As a part of long-term strategy to strengthen India ’s organic agriculture and markets, International Competence Centre for organic Agriculture (ICCOA), the Bangalore based non-governmental organisation, is organising an international organic trade fair- ‘India Organic- 2005’ in November this year. The event will highlight the present scenario of the organic agriculture I India and also deliberate on improving the positioning of the Indian Organic sector at the national and international level. The objective of the event is to increase awareness about organic agriculture among farmers, processors and consumers linking buyers and sellers and strengthen and promote the domestic and export market for organic produce.

o       The Food Ministry has proposed to set up ‘grain banks’, which would loan grains to Below Poverty Line (BPL) and Antyodaya Anna Yojna families. The idea is to have a ‘bank’ in the areas prone to natural calamities, where the transactions are made with foodgrain and not money. Under this scheme each family is entitled to a quintal of foodgrain, in one go or in installments. This one quintal has to be paid back by the family within a year with minimum interest or is adjusted through its PDS entitlement. The scheme was initially started as a pilot project by the Ministry of Tribal Affairs in 11 states to prevent the death of tribal children.

INFRASTRUCTURE

·        Overall

o       Planning commission member said that the government would no longer provide full budgetary support for infrastructure projects but only fund the viability gap with focus on six infrastructure areas – roads, airports and ports, national highways, railways, power and urban renewal.

·        Electricity

o       Central Electricity Authority (CEA) has formulated a National Transmission Plan (NTP) with an objective to achieve an inter-regional transmission capacity of 16450 Mw and 37150 Mw by the end of the 10^th    and 11^th five-year plans respectively from the current capacity of 9450 Mw.

o       CEA chairman claimed that it has identified projects far in excess of this requirement to meet all-India peak demand of 151648 Mw by the end of the eleventh plan. However he stressed the importance of reduction in T&D losses and the necessity of importing hydro-power from Nepal and Bhutan to meet targeted hydro generation of 280000 Mw.

o       Power ministry in the implementation of its rural electrification programme has introduced a franchisee model in order to increase revenue sustainability. West Bengal has already launched the franchisee model by involving self-help groups; Karnataka plans to carry it out through registered panchayats; and Uttar Pradesh has begun tendering for franchisees’ selection.

·        Petroleum and Petroleum Products

• India’s petroleum product consumption has risen by a massive 10.1 per cent in August to 7.5 million tonne on the back of increased demand for petrol (a rise of 16 per cent), diesel (17 per cent) and aviation turbine fuel (17 per cent), as against 6.9 million tonne of oil products consumed a year ago.

• Central board of excise and customs has clarified that there will be no cess on export of petroleum products; bringing relief to state owned oil companies and especially to Reliance Industries, which exports 30 per cent of the products from its 33 million tonne Jamnagar refinery.

·        Steel

o       The government has appointed a high-level committee to review the National Mineral Policy and suggest amendments to the Mines and Minerals Development and Minerals Act 1957 to address increasing concerns of domestic steel producers regarding rising iron ore exports from India inspite of India having large iron ore reserves; while production of iron ore is growing at 21 per cent, exports are accelerating at around 25 per cent.

·        Railways

• Railways have registered 17 per cent growth in earnings at Rs 4119 crore in August 2005 as against Rs 3518 crore in the corresponding period last year; total earnings are 5.37 per cent more than budgeted target of Rs 3910 crore. The growth in passenger bookings has been was 5.13 per cent with passenger bookings rising from 456 million in August 2004 to 459.40 million in August 2005.

• Airways

• Contracts for modernisation and privatisation of Delhi and Mumbai airports, whose combined profits-before-tax for 2002-03 are estimated at Rs 506 crore, are planned to be awarded before December 2005. Six out of eight pre-qualified bidders have submitted technical and financial bids that are expected to be evaluated within six weeks.

·        Shipping

• An increasing number of Indian ships, 11 ships in number, have been detained abroad in the first eight months of the calendar year 2005 as compared to 14 ships in the whole of last year; resulting in losses due to payment of penalty and repair costs and most severe losses of voyage days. The cost of detention is $25000 to $30000 per day for new vessels and $10000 to $15000 per day for old vessels. International Port State Control (PSC), has placed Indian ships in the grey list indicating medium risk of detention, though if multiple detentions continue there is a danger of Indian vessels being blacklisted.

• The government, in an attempt to facilitate financial and operational autonomy of major ports, has allowed them to raise loans, run overdrafts and even write of losses. The boards of port trusts can raise loans upto an amount equal to 20 per cent of their approved annual budget; category I ports can take temporary loans upto Rs 5 crore while category II ports can raise upto Rs 3 crore.

INDUSTRY

·        Overall

• The general Index of Industrial Production (IIP) has registered a 6.7 per cent growth for the month of July 2005, lower than the 8.7 per cent growth in July 2004, mainly due to a fall in output of both mining and power by 0.4 per cent and 1.2 per cent respectively, while manufacturing grew at 8.3 per cent.

·        Pharmaceuticals

• India is set to tighten norms for manufacture and export of ayurvedic products, following countries like Britain and Canada restricting imports of such products citing presence of heavy metals, claimed to cause side effects.

• Indian pharma industry has requested the government to freeze prices on life-saving drugs in core essential pricing, allowing increases only due to inflation and taxes, to augment the production and supply of such drugs.

·        Textiles

• Cotton prices have fallen by almost 25 per cent since mid-2004 and predicted to remain low for at least the next two-three years given the rising cotton yield and a stable to increasing acreage that is likely to ensure adequate cotton supply in the country. As against this, polyester industry could be adversely affected by high crude prices and overcapacity. This might result in a substitution effect in the price sensitive Indian textile market and a consumption shift favouring cotton over polyester.

·        Automobiles

o       The used cars business in Mumbai has slowed down considerably post the July deluge; buyers of apprehensive of being saddled with a flood damaged car and increased maintenance costs while sellers are also not coming up with their vehicles due to fear of being unable to get a good price.

CORPORATE SECTOR

o    The Aditya Birla group has restructuring itself by merging Indo Gulf fertilisers and Birla Global finance with Indian Rayon. The new company named Aditya Birla Nuvo, will be third largest group company focusing on textile carbon black, fertiliser, information technology and financial services.

• Essar group has acquired TPG Nambiar’s 13 per cent share in BPL communications for Rs 125 crore.

• Gujrat NRE coke has acquired a 5 per cent shares in Australian coal producers, Resource Pacific Holdings limited for Australian $ 8.1 million.

• Raymond has decided to transfer its 74 per cent shares in Color Plus fashions to its wholly owned subsidiary Raymonds Apparel.

• Sun Pharmaceutical industries has acquired a manufacturing facility of the Ohyo based Valeant Pharmaceuticals international in Bryan .

o       Polyester chips maker, JBF industries has decided to set up a new plant at

• Emirates. The cost of the plant would be around $84 million and the plant will have a production capacity of 600 tonne of SSP chips per day and 300 tonne of polyester film per day.

• Great Eastern Shipping company limited has decided to restructure its offshore services business into a separate company Great Offshore limited.

• Mahindra and Mahindra has decided to acquire 80 per cent shares of the Romanian firm. The Romanian firm produces 15,000 tractors a year at its factory in Brasov and has an additional capacity of 18,000 engines annually.

• Behr India limited has entered into the engine cooling segment. The company has launched Rs 60 crore expansion plan to set up a new plant. Behr India is the sole supplier of car air conditioners to Tata Motors, Mahindra, General Motors India and Renault.

• Cummins India limited will set up an additional manufacturing factory at Pune. The new manufacturing factory will be involved in assembling of low horsepower engines and generator sets for domestic and export markets. The company will invest Rs 15 crore in this factory.

• Atlas cycles has decided to diversify its business into the pharmaceutical sector. The Malanpur division has decided to do contract manufacturing for the pharmaceutical industry and has planned to set up a factory in Harid.

BANKING

• IDBI Ltd. has been categorized as a scheduled commercial bank as per the second schedule of the Reserve Bank of India (RBI) Act, 1934. Following the merger of the IDBI Bank Ltd with IDBI Ltd. with effect from April 2, 2005, the RBI has excluded the name of the former from the second schedule of the RBI Act.

• Priority sector advances constituted the bulk of banks’ non-food credit in financial year 2004-05 at 37.1 per cent, followed closely by credit to medium and large industries, which accounted for 31 per cent of gross non-food credit. According to the latest data released by the RBI in its handbook of statistics on the Indian economy, total advances made by banks to the priority sector posted a rise of 23 per cent in the reporting fiscal, to Rs.3,45,627 crore, as against Rs.2,63,834 crore in the proceeding fiscal.

• The coverage of the Real Time Gross Settlement (RTGS), system in banks’ branches has exceeded the target of 10,000 branches, six months ahead of schedule. RTGS membership now includes 94 banks, the Reserve Bank of India (RBI) and primary dealers.

• The factoring industry in India is finally coming out of its nascent stage with several private banks, such as Citibank and Standard Chartered planning to foray into this business. The main beneficiary of this development will be the small and medium enterprises (SMEs), since it will facilitate credit flow to the SMEs.

INFORMATION TECHNOLOGY

o       SAP AG, the world’s largest maker of business-management software, expects more than 40 per cent of Asian banks updating their main computer software in the next 3-5 years to cut costs and increase flexibility. Most banks in Europe and Asia still run their own systems, around 30 per cent of European banks and 22 per cent of banks in North America are planning to replace their systems. SAP, the German software company sells its software to 33 of the 50 largest banks in Europe .

o       Chennai-based Business Process Outsourcing (BPO) firm, Office Tiger had reached an agreement to acquire MortgageRamp, a US-headquartered BPO firm servicing the global real estate finance industry. With the agreement, Office Tiger would acquire 150 clients of MortgageRamp’s veteran knowledge and existing talent pool of 300 associates and network of more than 2000 experienced real estate finance professionals.

o       India has made it to the top five countries in terms of number of internet users. According to global statistics, India had 39 million users as on July-end. However in terms of actual number of subscribers, India has only 5.7 million. Despite phenomenal growth witnessed in terms of new users during the period 2000-2004, India ’s penetration level is as low as 3.6 per cent as compared to China ’s 7.9 per cent in the year 2004-05. USA tops the list of internet users with over 2 billion of them, while China is the only other country to cross the one billion user mark. In India , the number of internet users is higher than the number of internet subscriber because there can be multiple users for a single connection. Of the 5.7 million internet subscribers in India , 90 per cent use dial-up connection and the rest use broadband connection. MTNL, which offers internet services in Delhi and Mumbai, accounted for one million subscribers as on March 31, 2005.

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TELECOM

o       For the first time in the country, mobile phones users will be able to make payment of purchases over the phone. Airtel, ICICI Bank and Visa have jointly launched this new service ‘mChq’. Under this service, the sim card serves as a credit card and the mobile phone serves as secure point-of-sale (POS) and a payment mechanism. Airtel customers subscribing to this service will be issued a new Sim card free of cost while ICICI Bank cardholders will be issued an add-on card on the basis of their existing ICICI Bank Visa credit card.

INFLATION

o       The annual point-to-point inflation rate based on wholesale price index has gone up to 3.16 per cent during the week ended September 3, 2005 from 3.01 per cent registered during the previous week. The inflation rate was at 8.15 per cent in the corresponding week last year.

o       The WPI in the week under review has risen by 0.4 per cent to 195.7 from the previous week’s level of 194.9 (Base: 1993-94=100). The index of primary articles’ group has increased considerably by 0.7 per cent to 194.7 from the previous week’s level of 193.4, due to a sizeable increase in the price indices of both, food articles and non-food articles. The higher prices of food articles have been evident due to the higher prices of fruits and vegetables, eggs, condiments and spices. Similarly, the higher prices of non-food articles are attributed to the higher prices of logs and timber, safflower, fodder and groundnut seeds. The index of fuel, power, light and lubricants group has also risen considerably by 1.4 per cent to 308.3 from the previous week’s level of 304.1, mainly due to higher prices of naphtha, furnace oil and aviation turbine fuel. The heavy-weighted manufactured products’ group constituting 63.7 per cent of total weight, has declined a tad by 0.1 per cent to 170.9 from 171 of the previous week’s level.

o       The latest final index of WPI for the week ended July 9, 2005 has been revised upwards; as a result both, the absolute index and the implied inflation rate moved up to 194.5 and 4.46 per cent instead of the provisional levels of 193.9 and 4.14 per cent, respectively.

o       The inflation rate has started moving up due to the fading impact of high base effect. The recent hike in the prices of petroleum products by the government, which was effective from September 6^th, may further stimulate inflationary pressures on the economy in the near future, through its cascading effects on the related sectors like transport.

LABOUR

o       The National Rural Employment Guarantee Bill, 2004, has been passed by the parliament and is awaiting Presidential assent. However, according to the National Commission on Farmers, the employment guarantee for 100 days per rural household is too low to make any meaningful dent in rural poverty. It insisted that the number of days for assured employment should be increased as both on-farm and non-farm employment availability continues to be low. In addition to this, the Commission has proposed 50 per cent reservation for women under the new employment guarantee law. Due to wage rate differential in centre and different states, it also recommended to rely on State Minimum Wage Act, which takes into consideration the local income and price levels. It further suggested that the law should clearly spell out the responsibility of the states towards the eligible households and protect them even in cases of inadequate release of funds from the Centre.

SOCIAL SECTOR

o       The Human Development Report, 2005 published by United Nations Development Programme (UNDP) has placed India at the same low previous level at 127 out of 177 countries in Human Development Index (HDI) for the year 2005. The index measures life expectancy, school enrolment, gender equity, income, sanitation and hygiene as development indicators. The Indian HDI value is 0.602, which brackets India in medium development category (HDI values of more than 0.5); a category in which India has been since around 1990. Interestingly, the entire South Asia has moved to medium category, whereas the countries in low human development category are essentially from sub-Saharan Africa . The report highlights remarkable performance of Bangladesh and China .

FINANCIAL  MARKET

·        Capital Markets

§         Primary Market

o       The IPO of Suzlon Energy, a Pune-based player in wind energy, which is to open on September 23,  prices Rs 425-510 per share for an issue size of 29.34 million shares, which includes a fresh issue of 26.76 million. The company hopes to raise between Rs 1,140 crore and Rs 1,365 crore from this issue. 

§         Secondary Market

o       There are no better words to describe the rally currently being witnessed on the Indian bourses. It has been pouring (read FII inflows) and pouring hard on the Indian stock markets, which has pushed the Indian indices well beyond the expectations of 'most' of the optimists. The BSE sensex this week closed just shy of the 8,400 levels after having gained almost 4 per cent. The Nifty too logged in similar gains this week. There buying was witnessed in mid-caps too, which was relatively less exciting. In the week under review, the BSE sensex touched an all-time high of 8388.80 before ending the week at a new all-time high of 8380.96 against the last week’s close of 8060.01 recording gains of 320.95 points. The NSE nifty gained 96.90 points to close at a yet another high of 2552.35 points.

o       While the markets continue to make new lifetime highs, this development has come about without any major positive fundamental development and the overlooking of negative news (like crude oil). While SEBI's approval for liberal norms pertaining to the futures & options segment for domestic MFs may have aided sentiments in the second half of the week, it is sheer liquidity that is driving the indices to unimaginable heights. Money has been pouring in from all factions of the market - FIIs, domestic MFs and non-institutional investors.

o       Between September 1 and 15, FIIs have been net buyers of equities of Rs 2882 crore with purchases of Rs 12,906 crore and sales of Rs 10,024 crore. During the week, they have been net sellers on September 12 and net buyers on all the other trading days.

o       Mutual funds have also been net buyers of equities during the period between September 1 and 15 to the extent of Rs 1639.57 crore with purchases of Rs 4389.55 crore and sales of Rs 2749.98 crore.

o       A comparison between the price/ earnings ration of India and other Asian countries shows that the Indian scrips are more costly than their South Korea , Hong Kong , Malaysia and also than some of the European countries such as Germany .

o       RBI governor said that measures to prevent urban co-operative banks from illegally diverting funds into stock market would be announced.

o       During the period between June 2004 and June 2005, FIIs have invested more than US$ 6 billion. Their holdings in nifty stocks as of June 2004 has been Rs 1,10,000 crore, which has risen to Rs 2,25,911 crore in June 2005. The reason for  majority of FIIs tapping the domestic markets is due to low risk premium, higher growth potential for India as a whole and continuation of low return regime in the developed markets.

o       Despite slowdown of investments flows from US, they have been compensated by the inflows from FIIs based in other countries. In July 2005, Japanese institutions have invested almost half of the total FII inflow of about US $ 2 billion.   Unlike in past, the sources of FII inflows are broad-based now. 

o       Some of the companies whose share prices have surged sharply in this on-going bull run have been making losses for several years and in may cases, the loss is more than sales for the latest financial year. For instance, the stock of Autorider Finance has risen by 5.5 times from its 52 week low of Rs 1.24 despite no income from the operation of the business. 

o       The director –general Hydrocrabons V K Sibal has lodged a complaint with the Sebi against ONGC for making an oil discovery public  without informing the stock exchanges. 

o       The finance ministry has asked Sebi and RBI to keep a close watch on the accounts of co-operative banks and NBFCs to ensure that funds borrowed from them were not routed to the stock markets for speculative activities.

·        Derivatives     

o       Sebi has decided to allow full-fledged participation to mutual funds in derivatives market at par with FIIs. The decision follows Sebi’s secondary market advisory committee (SMAC) recommendation of bringing MFs on par with FIIs.

o       The F&O segment started the week on a lacklustre note but the activities gained momentum  later. The highest trading interest was seen on Wednesday when market underwent brief correction. The FIIs were active in this segment with major buying interest in index futures and options. 

·        Government Securities Market

§         Primary Market

o       The RBI conducted ‘on-tap’ sale of 7.53 per cent 2015 for eleven states for an aggregate amount of Rs 2931 crore.

§         Secondary Market

o       The call money rate edged higher during the week due to greater demand for funds and ruled in a range of 5-5.10 per cent as compared to 4.95-5.05 per cent in the previous week. Also, the size of bids tendered under the LAF’s reverse repo has been marginally smaller as compared with those in the previous week of around Rs 45,000 crore each day.

o       With the inflation rate edging up, the market sentiments turned cautious, but as the finance minister allayed concerns that inflation may lead to higher interest rate market sentiments turned buoyant. Further, the easing of global oil prices supported the buoyant sentiments. Due to outflows on account of advance tax payments and state loan auctions, the yields firmed up marginally.  The weighted average YTM of 8.07 per cent 2017 rose marginally from 7.11 per cent on September 9 to 7.12 per cent on September 16.

·        Bond Market

o       During the week, there were three issuers in the market: UCO Bank, Union Bank and Power Grid Corporation to mobilize an aggregate amount of Rs 1,950 crore.

·        Foreign Exchange Market

o       With the improvement in cash dollar shortage due to consistent inflow of foreign currency assets, the forward premia have been rising across maturity.  The six-month forward premia has firmed up from 0.58 per cent on September 9 to 0.62 per cent on September 16.

o       As per the RBI monthly bulletin, the RBI turned net buyer of dollars in July, for the first time in this fiscal, to the extent of US $ 2.473 billion. It is believed that the entire buying would have taken place after the revaluation of Chinese Yuan on July 21.  

·        Commodities Futures derivatives

o       The NCDEXAGRI index fell from 1239.04 on September 12 to 1237.43 on September 17 as prices of commodities such as rubber, coffee, soyameal, and crude palm oil have fallen in tandem with the fall in global markets.

o       Rubber futures settled lower tacking heavy losses in Tokyo Commodity Exchange. However, physical supply of rubber was still limited amid healthy demand from Chinese tyre makers.

o       Coffee prices have plunged no low volumes amid rising supplies of raw coffee in the international markets. 

• The rally seen in the gaurseed appears to be loosing its steam as late monsoon in Rajasthan has dispelled doubts of a possible crop failure. On August 20, guarseed was trading around Rs 1,550 per quintal at NCDEX, but as traders began betting on a crop failure following sporadic rains, futures and spot prices began to rise. The spot prices rose to as high as Rs 2,050 per quintal in the last week of August. In the futures market, the price shot up to Rs 2,400 per quintal for the far month crop. The volatility in guarseed prices was close to 10 per cent on a day-to-day basis. The exchange increased the margin to 22 per cent from 10 per cent. However, high frequency trading continued. Traders with buying positions benefited from their open interest positions and those who had purchased futures at low prices squared them off at higher prices. However, sellers have suffered losses due to the spurt in prices and also as the margin was increased. As the prices have eased, NCDEX has reduced the margin, but volatility has prevailed around 6 per cent.

CREDIT  RATINGS

o       Care has assigned ‘AA+’ rating to Dewan Housing Finance Corporation Ltd.’s (DHFCL) Rs. 175 crore (enhanced from Rs. 100 crore) non-convertible issue. The rating takes into account the increase in Tier-I capital of DFHL post right issue, DHFL’s long standing track record in housing finance business, consistent high asset quality and good recovery performance.

o       Care has reaffirmed ‘PR1+’ rating assigned to the short-term debt programme of Kesoram Industries Ltd. (KIL) aggregating to Rs. 100 crore. The ratings factors in the experience of the promoters of the company as well as the  satisfactory performance of the cement division, captive power plant resulting in substantial cost saving, comfortable financial position with satisfactory interest coverage and favourable outlook for both cement and tyre industries.

o       Care has assigned a ‘PR2’ rating to the Rs. 50 crore commercial paper programme of Tamilnadu Petroproducts Ltd. (TPL). The rating takes into account the falling margins and tight liquidity position of TPL as a result of rising cost of raw materials, toughening competitive position in the domestic market, high dividend payout & continuing unproductive investments in subsidiaries and joint ventures despite unfavourable financial performance.

o       Care has assigned ‘AAA’ rating to the Tier-II bond issue of HDFC Bank Ltd. for an amount of Rs. 1,000 crore. The rating factors in HDFC’s strong market position, its good asset quality, robust risk management system, excellent technology infrastructure, proactive management, comfortable capital adequacy and overall good profitability parameters.

o       Icra has upgraded the medium term rating assigned to the fixed deposit programme of Steel Authority of India Limited (SAIL) from ‘MA+’ to ‘MAA’. The rating upgrade takes into account significant improvement in financial risk profile of SAIL with the company utilising its strong cash flows in financial year 20040-05 to reduce its debt levels.

o       Icra has retained the ‘LAA-‘rating assigned to the Rs. 655 million non-convertible debentures programme of Trent Limited. The rating factors in Trent ’s strong capital structure which it has managed to maintain post-acquisition, its demonstrated ability to profitably replicate retail formats across various geographic locations in India and the strength of Tata Group as a promoter.

o       Icra has downgraded the rating assigned to the Rs. 958 million non-convertible debenture programme of Escort Limited (EL) from ‘LB’ to ‘LD’. While the company has been delaying payments on its obligations for sometime, the agency had expected EL’s financial risk profile to improve with the likely infusion of preference capital, initiatives taken by the management to rationalise cost structure and the overall positive outlook for the tractor industry. However, with greater than expected delay in fund infusions along with continuing losses at the operating level has diminished any prospects of the company to improve its debt servicing ability, thus necessitating a downgraded.

o       Following the merger announcement of Indo Gulf Fertilisers Limited  (IGFL) and Birla Global Finance Limited (BGFL) with Indian Rayon and Industries Limited  (IRIL); Icra has put the ‘LAAA’ rating assigned to the non-convertible debenture programme of IRIL to be renamed as Aditya Birla Nuva Limited, on ‘Rating watch with developing implications.

PUBLIC FINANCE

• According to Finance Ministry data, the government has mopped up Rs. 1,240 crore worth direct tax arrears during the first quarter of the current fiscal year, a 13 per cent raise over Rs. 1,100 crore collection during April-June last year. Out of this, Rs. 180 crore is from income tax arrears and Rs. 1,060 crore from corporation tax arrears. Finance Minister has set Rs. 10,000 crore target for direct tax arrears collection for the current financial year. The total direct tax arrears demand has increased to Rs. 98,606 crore as on April 01,2005, compared with Rs. 93,901 crore a year earlier. Of this, 85 per cent is the net collectible demand, while 28 per cent demand has not fallen due so far.

• The Central Board of Excise and Customs has issued instructions to all field formations stating that the tax on services provided within a airport would have to be collected by the concerned airport authority. During the first four months of the current fiscal year, the government has collected Rs. 4,890 crore as service tax, as against Rs. 3,415 crore up to July 2004, an increase of 43 per cent. 

• The revenue department may change the Rs. 1 crore excise duty limit for identifying taxpayers eligible for large taxpayer units (LTUs), to be made operational early next year; following the industry’s suggestion that the limit of Rs. 1 crore is too low and that it should be hiked to at least Rs. 10-20 crore.

o       As per the Finance Ministry data, after a long time, states are witnessing cash surplus at around Rs. 31,000 crore as on September 10. Around Rs. 8,000 crore of the surplus of the states is on account of a higher devolution of taxes in the wake of Twelfth Finance Commission.

• The Karnataka state government  which has registered a 16 per cent growth in its net tax collection, excluding petroleum products and a 27 per cent increase in its gross tax collection up to July, has suddenly sought for a compensation of Rs. 394 crore from the Centre for the first four months of the current fiscal year. This has made the Finance Ministry worried as it thinks that the states may be underplaying their tax buoyancy under VAT so as to obtain compensation from the government. The Centre has so far released Rs. 246 crore as compensation for the first quarter. The Centre has earmarked Rs. 5,100 crore as compensation for VAT for 2005-06.

• The Finance Ministry has pegged the indirect tax arrears collection target at the same level as last year at around Rs. 3,000 crore. The overall indirect tax collection up to August 2005 at Rs. 70,988 crore is marginally higher than the moving target of Rs. 69,337 crore. A significant feature is that the excise collections have registered a growth of over 9 per cent at Rs. 39,015 crore, compared with Rs. 35,532 crore during April-August last year.

• Uttaranchal would introduce the VAT regime from October 01 2005. Under the new system, the trade tax department of the state will be known as commercial tax department. A dealer/manufacturer will have to pay tax only if his turnover exceeds the minimum taxable quantum of Rs. 5 lakh raised form the earlier Rs. 1.5 lakh by the empowered committee. Any dealer already registered under the trade Act with turnover more than taxable quantum under VAT shall have to be registered under the new tax structure.

EXTERNAL SECTOR

o       To attract higher foreign direct investment in services, developing countries like India should distinguish between barriers to trade in services and barriers to investment in services. According to an Icrier study, this distinction will help bring the extent of restrictions in trade and investment in the sector within manageable limits. The study says development of telecommunications and information technology infrastructure is of great importance with respect to trade and services in a developing country.

o       The textile ministry’s ambitious ‘Scheme for Integrated Textile Parks’ (SITP) may soon be converted into Special Economic Zone (SEZs) if respective state governments relax their labour laws and the private developers are interested to develop them.

o       India ’s exports during April-August 2005 valued at $35.7 billion are 22.9 per cent higher than the exports during April-August 2004 valued at $29.0 billion.

o       During the same period imports are valued at $53.1 billion representing an increase of 37.0 per cent over imports of $38.8 billion during April-August 2004. The trade deficit for the first five months of financial year 2005-06 thus works out to be at $17.4 billion, much higher than the deficit of $9.7 billion during the same period previous year.

o       Oil imports, constituting almost 30 per cent of total exports, have touched the level of $16.4 billion during April-August 2005, which is 36.8 per cent higher than oil imports during April-August 2004. A high growth in oil import bill could be attributed to high international oil prices. During the same period, non-oil imports contributing a bulk of total imports (70 per cent) also witnessed a robust growth of 37.1 per cent to stand at $36.7 billion. A rise in non-oil imports is reflective of a high level of activity witnessed by the country in the recent times.

o       For the month of August, exports have maintained the growth momentum and registered a growth of 24.9 per cent increasing to $7.3 billion from $5.8 billion in August 2004. During the same period, imports have gone up from $7.9 billion to $10.4 billion, registering a rise of 32.4 per cent.

*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.

LIST OF WEEKLY THEMES

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