Current Economic Statistics and Review For the Week 
Ended October 1, 2005 (40^th Weekly Report of 2005)

I

Theme of the week:

Indian Textile Industry: Changing Face in the Post-Quota Regime

The textiles and garments industry is one of the largest and most prominent sectors of the Indian economy, in terms of output, foreign exchange earnings and employment generation. The textile industry provides employment to nearly 35 million people and is the second highest employer, next only to agriculture. It accounts for the one fifth of the country’s total export earnings. Indian textile industry is multi-fibre based, using cotton, jute, wool, silk and man-made and synthetic fibres. In the spinning segment, India has an installed capacity of around 40 million spindles (23 per cent of world), 0.5 million rotors (6 per cent of world). In the weaving segment, India is equipped with 1.80 million shuttle looms (45 per cent of world), 0.02 million shuttleless looms (3 per cent of world) and 3.90 million handlooms (85 per cent of world).

            Notwithstanding its relative importance, the Textile industry passed through has many vicissitudes in recent years; one evidence of this is seen in the share of textile exports in country’s total exports showing a declining trend from 23.5 per cent in 2002-03 to 16.5 per cent in 2004-05 (Table 1).  RMG (ready made garments) Manmade fibres, RMG wool, RMG of other textile material and RMG silk are the main commodities that have constituted the bulk of the textile exports.

On the import front, the industry is depending on foreign yarns to supplement the local output essentially for direct sale. Although the textile imports has been rising in value terms from Rs 7965.5 crore in 2002-2003 to Rs 9737.7 crore in 2004-2005, their share in the country’s total imports has fallen from 2.7 per cent to 2 per cent during the same period. Raw cotton is also imported to supplement domestic production (Table 2).

Chart 1 exhibits India ’s total textile exports in the fiscal year 2004-05, to top three countries. The European Union (EU) is the largest export market with exports worth US $ 3105.6 million (42 per cent of total textile exports) followed by USA and UAE with exports worth $ 3043.4 million and US $ 1042.5 million respectively.

 Readymade garments export contributes nearly 48 per cent to the total textile export of the country in 2004-05. Major export destinations for Indian readymade garments are EU , USA , UAE, Canada , Russia and Norway . During the fiscal year 2004-05, EU and USA have consumed 38 per cent and 30.5 per cent of India ’s total export, respectively.

Post – quota regime

 Removal of quota constraint from January 2005 has opened up substantial export opportunities for the textile sector, which is expecting a rise in demand. Consequently, companies are planning to expand their production capacity. Four textile majors have decided to invest Rs 2500 crore in Madhya Pradesh. Vardhaman group’s Mahavir spinning mills has finalised investment of Rs 1100 crore in Raisen and Sehor district. Pratibha Syntex limited has decided to set up a towels project near Indore . LNJ group’s Maral overseas limited and Nahar spinning mill has also decided to invest for expansion. Jindal Polyfilms has raised Rs 300 crore from the market to fund its expansion plans. Abhishek industries is also planning to invest Rs 200 crore for expansion.

            The export demand for home textile segment has increased across all categories of home furnishing products like bed sheets, table clothes, curtains, terry towels etc so textile companies have decided to enter into home textile segments. Textile companies like Welspun India limited and Abhishek industries have invested heavily in augmenting capacities for the home textiles followed by Aarvee Denims and Exports limited, S Kumars Nationwide limited, Gangotri Textiles, Hanil Era Textiles limited. These companies have invested to enhance its production capacities to meet the growing export demand.

Backdrop

The focus of this write-up is to find out how Indian textile firms are expected to perform in the quota - free regime that has begun from January 1, 2005. This section will give a cursory glance at the historical perspective of the quota system that prevailed over four decades in the international textiles and garments sector.

The process of full integration of textiles and clothing into the multilateral trading system has begun from January 1, 2005, with phasing out of trading quotas from this sector, which is expected to bring about structural changes in the global trading pattern. Trade Quotas, a unique concept of quantitative barriers, were introduced in this sector for the first time in 1961, under the agies of the Long Term Agreement (LTA), with the sole aim of protecting and safeguarding the interests of the textile and apparel industry in the developed countries, viz. Canada , USA and EU. LTA was renegotiated several times and was replaced by a Multi-Fibre Agreement (MFA) in 1974. The MFA, as the name suggests, extended restrictions on trade to wool and man-made fibres in addition to cotton. 

The MFA was renegotiated four times and finally it expired in 1994. Six developed countries applied quotas under the MFA during the final years of the agreement (the EU, Austria , Canada , Finland , Norway and the United States ), and the quotas were applied almost exclusively to imports from developing countries. In 1995, the MFA was replaced by the World Trade Organization (WTO) Agreement on Textiles and Clothing (ATC), which was a transitory regime between the MFA and the integration of trading in textiles and clothing in the multilateral trading system.

ATC provided for the elimination of quantitative restrictions through a stage-by-stage removal of existing quotas (‘integration’, as described by the agreement), and through accelerated expansion of the remaining non-integrated quotas (‘liberalization’), expected to be completed within a period of ten years (1995-2004). The process was divided into four stages, starting with the implementation of the agreement in 1995. The product groups from which products were to be integrated at each stage of the integration included (i) tops and yarns; (ii) fabrics; (iii) made-up textile products; and (iv) clothing. In the first stage, each country was required to integrate 16 percent of the total volume of imports of 1990, followed by a further 17 percent at the end of first three year and another 18 percent at the end of third stage. The fourth stage would see the final integration of the remaining 49 percent of trade.

In the beginning of January 2005, it was observed that, stages 1 to 3 have been implemented according to the letter in the agreement, but with the exception of Norway, the remaining three countries Canada, USA, EU countries that carried the MFA restrictions into the ATC have to a large extent used all opportunities available to retain restrictions in the most sensitive areas. They have inflated the basis from which liberalisation is measured and they have first liberalized the restrictions that appear not to be binding.

Expectations in the post-quota regime

In general, experts have predicted that elimination of quotas will

• benefit consumers, basically due to lower prices (Tyagi 2003). Thus, there are transfers of income from domestic producers in developing countries to consumers in developed countries—that is, an increase of consumer surplus and loss of developed-country producer surplus.

• increase competition between countries, as well as competition within each country, reducing tendencies toward oligopoly that were the consequences of the quota system. This new competition (both within-country and internationally) should provide more incentives to upgrade technology. Under the MFA, if a country was absorbing its full quota allocation, then there was little incentive to increase the quantity produced. Poor productivity spelt no reduction in market share since the quota fixed market share. With MFA expiration, poor productivity and high costs are likely to cause a reduction in market share. Thus incentives to upgrade technology and rationalise production processes are increased.

§         reallocate production away from high-cost countries that were producing only to take advantage of their quota, to low cost countries. Further as quotas are measured by quantity, not value, manufacturers seek to produce the highest value products possible under a given quota. Now, after elimination of quota the production of such goods will be comparatively expensive, hence these manufacturers will shift to production of lower-value products.

§         encourage the textiles and clothing sector in most competitive developing countries to develop the stronger clusters of textile expertise, enabling them to handle all stages of the production chain from growing natural fibres to produce finished clothing.

§         reduce the attractiveness of Outward Processing Programmes under which textiles and pre-cut materials are temporarily exported to low wage countries and re-imported under preferential provisions, since exporters and importers will no longer need to find ways to get around export quotas.

Although these general predictions give the impression that developing countries might have the edge over the developed ones, how much market share each one of these developing countries will be able to capture, is what is yet to be seen. Most analyses of the impact of the phasing out of the MFA stipulate that China and India might dominate world trade in textiles and clothing, with post-ATC market shares for China alone estimated at 50 per cent or more. China has competitive advantage over other countries in terms of scales of production, availability of raw material, fibre flexibility, automation of manufacturing operations, supply of skilled and technical work force. For example, in spinning, India ’s largest firm has a capacity of half-a-million spindles while the largest Chinese spinner has a capacity of nearly 3 million spindles. In the garment sector, as per the KSA Technopak data, India ’s two largest exporters are around $100-125 million in size, while the Chinese firms are between $500 and $800 million in size. Chinese export basket is more comprehensive in terms of product categories as compared with India ’s. An increase in the productive capacity of Chinese firms coupled with operational efficiencies, resulting in better pricing leverage, has enabled China to emerge as the world’s largest producer and exporter of textiles and garments. This is quite clear from the fact that during the period January-May 2005, imports of textiles and garments by USA and EU from China has grown by 67.1 per cent and 41.3 per cent in value terms, respectively. 

Indian Textile Industry after January 2005

India has emerged as the second largest gainer in the international textiles and clothing markets after China and is considered as an obvious sourcing alternative to China . India ’s performance has been better than many other countries like Pakistan , Bangladesh , Thailand , Indonesia and even Turkey , which has a Custom Union with European Union (EU). Imports of textiles and garments from India to USA and EU, during January-May 2005, have jumped by 29.6 per cent and 13 per cent in value terms, respectively.

The order book position of textile giants has shown tremendous increase after the abolition of quota system in January 2005 as compared to the previous year. The companies are utilising their 100 per cent capacity to meet the international requirements. Arvind Mills has planned to set up a cotton trouser unit and a jeans plant in Banglore. After the expansion, the company’s production capacity will double over 14.4 million pieces from the current production of 7.2 million pieces. Welspun India the biggest maker of terry towels has also witnessed huge increase in its export demand during January–June 2005. The company has exported over 1000 tonnes to the US market within the first two months of opening up of quota. The industry, as a whole, from next year, is planning to tap overseas markets like South Africa , Middle East , Australia and New Zealand . As per SIA Statistics (Government of India), during January-June 2005, textile industry has been one of the leading industries those attracted maximum amount of investments. Total proposed investment in textile industry has stood at Rs 146,917 crore or 8.6 per cent out of an aggregate investment proposal of Rs 1706,087 crore filed with the government in the post – liberalisation period, August 1991 to June 2005, which routed through Industrial Entrepreneurs Memoranda (IEMs), Letter of Intent (LOIs) and Direct Industrial Licences (DILs). It is the fifth largest industry to experience this investment proposal.

However, in order to fully tap the potential offered by the abolition of quotas, Indian textile industry must move beyond just expanding its manufacturing capacity. As per the Economic Intelligence Unit (EIU), which is a global textile business information provider, EU and US are likely to impose more safeguard quotas on China . However, benefits of these new quotas, designed to protect the domestic industries in USA and EU, will not go to these industries, as price is still an issue. Hence, India should make most out of this situation capitalising on low labour cost and cutting other costs to a minimum. Another factor that might help India to achieve competitiveness vis-à-vis pricing strategy is Yuan revaluation. With China revaluating its currency, which has made its products comparatively expensive, demand for Indian textiles and garments products is expected to go up. Though the initial Chinese yuan revaluation has been marginal, there is tremendous pressure on China to pursue a more realistic exchange rate policy.

Impediments to growth in textile sector

While path-breaking efforts have been made with regard to the taxation policy for cotton textiles, some of the bottlenecks continue to hamper export growth. The expected quantum leap in exports would also depend on infrastructure support, lowering of transaction costs, reforms in labour laws etc. The recent chaos at the JNPT, Mumbai, for an instance, shows the extent to which infrastructure facilities are lacking in their ability to efficiently deliver goods, overseas. Cargo remained piled up and unattended for more than three months. Drastic steps need to be taken to ensure that such disruptions do not take place. If Indian ports are not equipped to handle the expected rise in exports, India would only end up losing export market. Apart from spinning, the rest of the activities like weaving, processing, made-ups and garmenting are all found to be fragmented in India . Besides, the level of technology in the Indian weaving sector is low compared to other countries. The share of shuttleless looms to total loomage in India is 1.8 per cent as compared to Indonesia (10 per cent), Bangladesh (10 per cent), Sri Lanka (12 per cent), China (14 per cent) and Mexico (29 per cent). The supply chain in this industry is not only highly fragmented but is beset with bottlenecks like erratic supply of power and water, improper road connectivity, that could very well slow down the growth of this sector. As a result the average delivery lead time (from procurement to fabrication and shipment of garments) still takes about 45-60 days, as against international lead delivery time of 30-35 days.

Similarly, transaction costs, which are estimated to be around 6 per cent-8 per cent of manufacturing costs, need to be brought down. Labour market reforms is the another area, where greater flexibility of operation would give a fillip to the setting up of mega production plants matching in size and scale with similar units in countries like China and Brazil for manufacturing of value added clothing products. Individual buyers are already imposing stringent compliance norms on the industry as a safeguard against unfair labour practice. With the markets already imposing self-regulation, there is a case for easing state regulations.

The industry and trade have been raising these issues for a number of years with the primary motive of encouraging fresh investments, but no satisfactory solution has been forthcoming. These issues need to be addressed on a priority basis and in a time bound manner, failing which India may lose valuable markets on account of our inability to leverage our advantages.

Textile Performance- Quarterly results

Be that as it may, the textile firms in the country have already begun to exhibit buoyancy in production, operation and profitability. More significant is the expansion in production capacity envisaged in the industry. Quarterly results of some of the leading textile manufacturing companies, as given in table 3, reveal an outstanding performance for the first quarter of 2005-06. All the companies have experienced a huge growth in their net profit. Arvind Mills, which is one of the top producers of denim in the world, has witnessed a 148 per cent jump in its net profit. It has identified the changing consumer demands and has focused attention on its core products. This has enabled the company to play a dominant role in the textiles sector. Century Textiles has shown better performance in the April-June quarter of   2005-06. Net profit has increased to Rs 46.1 crore in the first quarter of 2005-06 from Rs 19.9 crore in the corresponding period previous year, a mammoth increase of 131.7 per cent. Century textiles has proposed Rs 140 crore for expansion of denim plant to produce 10 million metres of fabrics per annum. Raymond’s textile division’s net profit stood at Rs 145.4 crore for the first quarter of 2005-06 - an increase of 38 per cent from the corresponding period last year. The increase in raw material cost has been compensated for by an increase in the quantity of fabrics sold. Suryalakshmi cotton mills ltd. has increased its capacity of denim to 30 million meters from 20 million meters. This combined with growing demand for garments in foreign markets since January 2005, has helped the company to post good performance during the first quarter of 2005-06.

Summing Up

Looking back over the period of last nine months, after the phasing out of quotas, it is becoming increasingly clear that large importing countries are yet to get fully adjusted to the liberalised regime in world trade in textiles and clothing sector.

Elimination of quota on the amount of production of textile and clothing in a particular country will now be cheaper for those countries, which can produce both textiles and clothing because they can now avoid transport costs, time delays and management time needed to coordinate. So, in post-quota environment, the most vulnerable countries are those that until now have handled only assembly.

Vertical specialisation is an important feature of this sector resulting from the fragmented supply chain in it. Vertical specialisation implies that the inputs embodied in the final product cross borders several times and such trade is very sensitive to the tariff level. Hence, the outcome of the phasing out of quotas will depend much more on the prevailing tariff rates and the preference margins of countries receiving such preferences than is captured by the conventional estimates. Second, time to market, that is time taken by the textile companies to market their products in the international market, is important and increasingly so, particularly in the fashion-clothing sector. Therefore, countries close to the major markets are likely to be less affected by competition from India and China than has been anticipated.

As far as India is concerned, Government of India certainly can play a crucial role in boosting textile and garment exports. The recent decision announced in the Union Budget to provide two routes for taxation in the cotton textiles sector, viz., CenVAT route and Exemption route is a landmark event in the annals of the Indian textile industry. With a single masterstroke, the anomalies in taxation haunting the cotton textile sector for decades have been removed, thereby creating a level playing field amongst all the stakeholders in the textile value chain. Allocation of infrastructure schemes has also been increased by eleven times to prepare textile industry to face challenges in post-MFA scenario.

A paradigm shift for Indian textile companies could be investing in making acquisitions of brands and retail businesses largely operating in clothing category in major markets such as US, the EU and Japan . Closer direct linkages with major international design and product development centres will also facilitate Indian textile and clothing companies to offer innovative products in the domestic as well as international markets. Another option for Indian textile and clothing companies to capture bigger share of global textile market in post-quota regime is creation Indian adaptations of successful businesses such as Inditex/Zara (Spain), H&M (Sweden), Gap (US) and Giordano (Hong Kong). The need of the hour, therefore, is to evolve a well planned strategy, aimed at improving the levels of productivity and efficiency, quality control, faster product innovation, quick response to changes in consumer preferences and the ability to move up in the value chain by building brand names and acquiring channels of distribution so as to outweigh the advantages of competitors in the long run.

References:

• EXIM Bank of India , (February 2005); “Textiles Exports: Post MFA Scenario: Opportunities and Challenges”, Research Brief.

• Nordås Hildegunn Kyvik; 2004 “The Global Textile and Clothing Industry post the Agreement on Textiles and Clothing”, WTO Discussion Paper-5.

• Hate Ashe, Shisir Khanal, et al (2005) “The Expiration of the Multi-Fiber Arrangement: An Analysis of the Consequences for South Asia”, University of Wisconsin System .

• Tyagi, Rahual. 2003. “Apparel Globalization: The Big Picture,” Apparel January 2003. Reprinted on New Century News web site published by the Natural Fibers Information Center , University of Texas at Austin .  www.utexas.edu/centers/nfic/NewCenNews/archives/2003/Feb.2003.ncn.htm.

• www.siadipp.nic.in

• www.texprocil.com

Highlights of  Current Economic Scene

AGRICULTURE   

o       Cabinet Committee on Economic Affairs has approved the Minimum Support Prices (MSPs) for fair average quality of rabi crops of 2005-06 to be marketed in 2006-07 as per following rates:

o       All the above MSPs for various crops have been recommended by The Commission for Agricultural Costs and prices (CACP). The prices of other oilseeds belonging to the rapeseed/mustard group has been fixed on the basis of their normal market price differentials with rapeseed/mustard. All India Grain Exporters’ Association has criticized a Rs. 10 increase in the in MSP of wheat stating that by raising wheat prices without increasing productivity, the government, besides increasing the subsidy bill, is encouraging chances of import in case of a shortage and making Indian wheat highly uneconomical in the international market. 

o       The National Agricultural Cooperative Marketing Federation of India Ltd (Nafed) has planned to invest over Rs. 250 crore in Tamil Nadu over the next five years to improve agriculture productivity, marketing and infrastructure. Nafed in association with Tamil Nadu Agricultural Department has planned to provide farmers a package covering high quality seeds and inputs, enhanced credit against stocks, training and marketing infrastructure. Key elements of the agreement between these two institution are (i) contract farming and  (ii) purchase of commodities directly from farmers by involving self-help groups. Nafed will facilitate procurement of contracted produce and assist in setting up electronic ‘Shandies’ and agricultural malls.

o       The government has allotted 37 lakh tonnes (lt) of sugar as the indigenous free sale quota (FSQ) for mills for the October-December quarter. This is 7.5 per cent lower than the FSQ of 40 lt released for the corresponding period last year. The 37 lt FSQ is in addition to 6.48 lt (2.16 lt for each month) released as levy sugar, which mills have to supply for meeting the requirements of the public distribution system for the coming (i.e. January-March 2006) quarter. Adding to the FSQ with the levy quota and with the festival quota of 54,155 tonnes, the total availability of sugar during the quarter of October-December 2005 would be 44.02 lt. However this is lower than the total availability of 46.48-lt sugar during the same quarter in 2004.

o       The Ministry of Food Processing Industry has favoured allowance of 100 per cent FDI in agri business including food processing sector, which contribute substantially to the overall GDP of the country. The government anticipates an investment of Rs. 1,50,000 crore to accelerate growth of the sector from current growth rate of 7 per cent to 10 per cent over the next 10 years.

INDUSTRY

o       The national manufacturing competitiveness council (NMCC), in order to achieve the targeted 12 per cent growth rate in the manufacturing sector, has suggested the need for full managerial and commercial autonomy for the public sector though it has remained silent on disinvestments; labour reforms like fewer inspections; better infrastructure, more FDI including retail FDI; and indirect tax reforms.

INFRASTRUCTURE

·        Overall

o       The overall index of six core infrastructure industries slowed down to 5.7 per cent in August 2005 from 6.3 per cent in the corresponding month last year, largely reflecting a sharp fall of 16.1 per cent in the production of crude petroleum from a growth of 5.1 per cent seen last August and also a slow down in growth of refinery products to 2.3 per cent in August 2005 from 4.4 per cent in August 2004. A strong double-digit growth of 17.8 per cent in cement and 10.9 per cent in the coal sector, along with over 7 per cent growth in each of electricity and steel production helped the overall growth in the six core sectors to rebound from near zero growth in July 2005.

·        Power

o       The power sector grew by 7.7 per cent in August 2005, very close to the 7.6 per cent growth during August 2004. Yet, cumulative growth in electricity generation slowed down to 5.8 per cent for the period of April-August 2005 as against a 7.8 per cent growth in the corresponding period of 2004.

o       The power grid corporation along with central electricity authority has launched exploratory work for introducing higher capacity transmission lines in order to facilitate large power transfers across regions.

·        Petroleum and Petroleum Products

• The massive drop of 16.1 per cent in crude production for the month of August 2005 is partially attributable to the loss of about 110000 barrels per day of output as a result of the fire that destroyed a platform at ONGC’s Bombay High oilfields on July 27.

• The petroleum refinery products have performed poorly during April-August 2005 with production growing a mere 1.8 per cent as against a robust 8.8 per cent in the same period of 2004.

• The Bombay high court has passed an order permitting transfer of assets of the Dabhol power project from Dabhol power company to Ratnagiri gas and power private limited.

·        Non-Conventional Energy

• Food and agriculture organisation (FAO) of the UN has expressed its desire to provide technical assistance to India for the launch of bio fuels on a sustainable basis. FAO will not provide financial aid but is keen to give technical help for promotion of bio fuels in the form of providing training and preparing various models of bio fuels in the country.

·        Coal

o       The growth of the coal sector has been 10.9 per cent in August 2005, a commendable improvement over 1 per cent growth in August 2004.

• The coal ministry has secured clearance for Rs 2500 crore investment and will soon approach the public investment board for the balance amount for its Rs 5000 crore emergency coal production plan, which envisages additional non-cooking coal production of 71.3 million tonne from existing 16 mines of 4 Coal India Limited companies.

·        Steel

• The growth in production of finished steel for August 2005 has been lower at 7.8 per cent from 9.3 per cent in August 2004.

·        Cement

o       A strong double-digit growth of 17.8 per cent was registered in cement production for August 2005, up from 1.1 per cent growth in the same month last year.

·        Roads

o       The central government has sanctioned a pilot project of Rs 77.2 crore to construct 48 kms of rural roads at 10 locations in 5 states using jute geo textile, under the pradhan mantri grameen sadak yojana, to be carried out by the respective state governments, with technical support from jute manufacturers development council.

o       The committee on infrastructure has decided that all work under phase five of the national highway development programme would be carried out under new agreements based on norms of design-build-finance-operate-transfer and public-private partnerships.

INFLATION

o       The annual point-to-point inflation rate based on wholesale price index has gone up to 3.7 per cent during the week ended September 17, 2005 from 3.5 per cent registered during the previous week. The inflation rate was at 7.9 per cent in the corresponding week last year.

o       The WPI in the week under review has marginally risen by 0.1 per cent to 196.5 from the previous week’s level of 196.4 (Base: 1993-94=100). The index of primary articles’ group has declined by 0.3 per cent to 194.9 from the previous week’s level of 195.4, due to a considerable decline of 0.8 per cent in the price indices of food articles. The lower prices of food articles have been evident due to the lower prices of fruits and vegetables, eggs, and jowar. The index of ‘fuel, power, light and lubricants’ group has remained unchanged at the previous week’s level of 313.9. The heavy-weighted manufactured products’ group constituting 63.7 per cent of total weight, has risen marginally by 0.1 per cent to 170.8 from 170.6 of the previous week’s level, primarily due to increase in the prices of ‘chemical and chemical products’, ‘non-metallic mineral products’, ‘transport equipments and parts’ and base metals.

o       The latest final index of WPI for the week ended July 23, 2005 has been revised upwards; as a result both, the absolute index and the implied inflation rate moved up to 195 and 4.33 per cent instead of the provisional levels of 194.5 and 4.07 per cent, respectively.

o       Even though the current rate of inflation at 3.7 per cent is not worrisome, it 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 has been effective from September 6th, and its consequent spiralling effects on the related sectors like transport, has also been partly responsible in stimulating inflationary pressures on the economy.

BANKING

• The Reserve Bank of India (RBI) has approved the merger of Centurion Bank and Bank of Punjab, which will be effective from October 1, 2005. The boards and shareholders of both the private sector banks have approved the merger and had set a share swap ratio of 4:9. This implies that for 4 shares of Bank of Punjab its shareholders will receive 9 shares of Centurion Bank. The merged bank will be called Centurion Bank of Punjab with gross assets of around Rs.9,400 crore and deposits of Rs.7,800 crore.

• In the Indian co-operative bank segment, voluntary mergers are gathering momentum. Pune-based Cosmos Co-operative Bank, which recently took over the Secunderabad-based Premier Co-operative Bank, is set to take over three more urban co-operative banks (UCBs). A middle-sized sick urban co-operative bank in Gujarat with more than 15 branches and two unit banks in Andhra Pradesh.

• Bank of Baroda (BoB) has amalgamated its three sponsored Regional Rural Banks (RRBs) in Gujarat, Panchmahal-Vadodara Gramin Bank, Valsad-Dangs Gramin Bank and Surat Bharuch Gramin Bank into one single RRB.

• Syndicate Bank has facilitated the merger of its regional rural banks (RRBs) into a new entity, Karnataka Vikas Grameen Bank, to be headquartered at Dharwar. The merger of Malaprabha Grameen Bank, Nethravathi Grameen Bank and Varada Grameen Bank will create a combined entity with a network of 387 branches accounting for a total business of over Rs.3,000 crore. The merged entity will be able to focus more effectively on fulfilling the requirements of farmers, small industries and artisans. Post-merger, Syndicate Bank will have 7 RRBs with a network of 1,163 branches spread over 28 districts in 5 states Andhra Pradesh, Kerala, Karnataka, Haryana and Uttar Pradesh.

PUBLIC FINANCE

o       The revenue outgo for the government under the new duty reimbursement scheme to replace the popular Duty Entitlement Passbook Scheme is proposed to be capped at Rs. 10,000 crore per year. The Committee of Secretaries (CoS) which had cleared the new duty reimbursement scheme is of the view that since the Centre would reimburse exporters for state levies, the states should be asked to phase out such levies over a period of time.

o       Following the various demands of 40 CEOs from the industry, the government is likely to consider tax sops for the food processing sector. The delegation presented Prime Minister with a wish list of sorts designed to unleash investments worth Rs. 1,50,000 crore over the next 10 years and create 9-10 million employment opportunities.

o       The VAT compensation claims outstanding with the Centre has crossed Rs. 900 crore, while the Centre has already disbursed Rs. 246 crore for Tripura, Andra Pradesh and Bihar (for details see the table given below)

o       With the exception of Bihar which has registered nearly zero growth under the VAT regime, most states for which data is available have registered an increase in tax revenues during the first five months of VAT. For the period April-July 2005, the growth in tax revenues across all VAT implementing states was 15 per cent.

o       Though the revised estimates of the combined revenue deficit of the Centre and states has risen to 4.1 per cent up from the budget estimate of 3.9 per cent during 2004-05; some of the states like Karnataka, Chattisgarh, Manipur and Madhya Pradesh have reported surplus in 2004-05. The improvement has been attributed to higher own tax collection by the states and more grants from the Centre. As per the provisional data submitted by 13 states to the Union finance ministry, 12 states have performed better than the Twelfth Finance Commission’s projections on revenue deficits. Similarly, at least nine of these states have reported provisional fiscal deficits that are lower than the budget estimate. To illustrate, Orissa has reported a fiscal deficit (provisional) of Rs. 1,257 crore as against the budget estimate of Rs. 4,070 crore.

o       As per the data released by the Comptroller –General of Accounts, the overall fiscal deficit till August 2005 has risen to Rs. 86,328 crore, which is 57 per cent of the budget estimate for the whole year. The deficit during the corresponding period last year was only 38.2 per cent of the annual estimate. Plan expenditure during April-August touched Rs. 47,336 crore, which is 33 per cent of the budget estimate compared with 26 per cent during April-August 2004-05. The Non-Plan expenditure was marginally lower at Rs. 1,23,453 crore, accounting for 33 per cent of the budget estimate as compared with 35 per cent of the budget estimate in the corresponding period last year. Meanwhile, total expenditure stood at Rs. 1,70,789 crore, which is 33.2 per cent of the budget estimate as compared to 32 per cent of the budget estimate achieved during April-August 2004-05. Revenue receipts at Rs. 81,169 crore accounted for 23.1 per cent of the budget estimates. The non-tax revenue at Rs. 22,687 crore accounted for 29 per cent, while the tax revenue at Rs. 58,482 crore accounted for 21 per cent of the budget estimate 

o       The double-digit growth in the manufacturing and services sectors during the April-June quarter of this fiscal saw the economy growing by 8.1 per cent against a 7.6 per cent in the corresponding quarter of the previous fiscal. Manufacturing sector grew by 11.3 per cent in April-June 2005-06 as against 7.9 per cent in the same period in 2004-05, while trade, hotels, transport and communication grew by 12.4 per cent, up from 11.5 per cent. The GDP at factor cost was Rs. 3,82,534 crore during the first quarter of 2005-06 against Rs. 3,53,717 crore during the same period last year. Nominal GDP at current prices grew 12.8 per cent during the quarter compared with 12 per cent last year.

FINANCIAL  MARKET

·        Capital Markets

§         Primary Market

o       Suzlon energy has set a price of Rs 510 per share for its IPO at he higher band. Suzlon raised Rs 1496 crore by selling 2.934 crore shares in the IPO, which was oversubscribed by about 40 times. The company had indicated a price range of Rs 425 to 510 a share.

§         Secondary Market

o       The stock indices continued their surging trend with BSE sensex touching an all time high of 8722.17 before closing for the week at 8634.48 points and NSE nifty touched a peak of 2633 before closing at 2601.4 points. FIIs and mutual funds continued to remain net buyers during the week. Further easing of international oil prices supported the bullish sentiments. Also, the robust GDP growth in the first quarter added to the buoyancy in the market. During the week, all the sectoral indices have registered gains with the highest gains recorded by BSE capital goods index. While BSE sensex has gained almost 5 per cent over the previous week, BSE small cap and mid-cap have registered gains of 1.6 per cent and 4.17 per cent, respectively.

o       Sebi is likely to announce changes to the demisting guidelines. The possible changes range from compulsory delisting of shares in case of companies with miniscule public share holding to penalties for promoters of non-compliant companies.

• For the entire month of September, the FIIs have been net buyers of equities to the extent of Rs 4646.80 crore, with purchases at Rs 26374.50 crore and sales of Rs 21701.30 crore. The net investment in dollar terms has been US $ 1065.50 million in September; while in the first nine months of calendar year 2005, they have invested $ 8592.40 million.   

• Large retail broking houses are dissuading investors from trading in speculative grade stocks for fear of price manipulation from their terminals.

• In its first action against penny stocks, Sebi has barred promoters of IFSL Ltd and Minal Engineering from dealing in capital market. Further, Sebi has barred promoters and directors of Prime Property Developers and Konkan Tyres from trading in the stocks of their company. With this Sebi has barred promoters and directors of four companies from dealing in the market and has suspended trading in six stocks for alleged manipulation. The stock exchanges too have been playing active role in checking the manipulation; BSE has, as of September 30, suspended trading in 27 stocks, while NSE has suspended six stocks. 

• In the first nine months of 2005, 81 companies have declared bonus issues. This is just three short of the previous high of 84 bonus issues in 1995.  

• Incidentally, South Korea has slapped a combined Won 214.8 billion (US $ 207 million) taxes on five foreign funds due to a public outcry against them as they have earned huge profits in South Korea without paying duty by taking advantage of double taxation treaty. 

·        Derivatives  

• The F& O segment saw hectic activity during the week following the close out of positions in September expiry and rollover trades in October contracts. The trading volume has been high given the fact that investors prefer to wait till the last moment for closing out their positions. Also, FIIs have been net buyers of options and futures.  During the week, the total daily derivatives turnover ranged between RS 23142.6 crore to Rs 29290.8 crore.

·        Government Securities Market

§         Primary Market

o       The RBI auctioned 10-year state development loan for six states for notified amount of Rs 839.42 crore. The cut-off yields have been set at 7.5 per cent for Assam and Jharkhad, 7.45 per cent fro Maharahstra, Tripura and Manipur, and 7.42 per cent for Kerala.

§         Secondary Market

o       The market sentiments remained cautious during the week due to the decreased liquidity and some trepidation on account of the domestic interest rate stance of RBI. Further, as the authorities expressed concern about the misalignment of interest rates, the market remained worried. In addition, a robust first quarter GDP growth  propelled the subdued sentiment

o       Dr C Rangarajan, Chairman, Economic advisory Council to the Prime Minister, has said that the state governments should reduce the incentives they offer on small savings, as interest rates on these instruments are higher than on bank deposits. 

o       RBI has released the indicative calendar for LAF for the quarter October – December 2005, with no change in the terms and conditions. 

o       Following the eleventh consecutive hike in the US Fed rate, DR R H Patil, member of RBI advisory committee, said that though there was no immediate upward pressure on interest rates, but domestic interest rates couldn’t be misaligned with the Fed rates.

o       The weighted YTM on 8.07 per cent 2017 rose from 7.15 per cent on September 23 to 7.20 per cent on September 30.   

·        Bond Market

o       During the week, IDFC tapped the bond market to mobilize Rs 250 crore by issuing non-convertible debenture of  10-years maturity offering coupon rate in the range of 7.35 –7.45 per cent. 

·        Foreign Exchange Market

o       According to RBI’s latest press release on sources of accretions to Foreign exchange reserves, it recorded a decline of US $ 3.1 billion during April –June 2005 as against an increase of US $ 6.6 billion in the corresponding period last year; the decline is attributed to the valuation loss of  $ 4.3 billion.

o       The rupee dollar exchange rate depreciated from Rs 43.93 on September 23 to Rs 44.08 on September 28, but appreciated to Rs 43.99 on September 29 partly due to the month-end demand for dollars and partly due to firmness of dollar against the major currencies such as the euro and the yen.

o       The six-month forward premia fell from 0.87 per cent on September 23 to 0.76 per cent on September 29.

·        Commodities Futures

o       Multi Commodity Exchange (MCX) is planning to float an initial public offer (IPO) to raise Rs 300 crore by December. If the issue goes through, then MCX will be the first commodity exchange to be listed on the bourses.

o       Forward Markets commission has increased the penalty on delivery failure across all commodities to 5 per cent from the current 0.5 per cent with effect from November 1.  If the transaction between buyer and seller is not settled before 5 days of the delivery date, the penalty will automatically be imposed.

o       The commodities futures market has been in a bearish state as indicated by the fall in the NCDEX AGRI index over the month of September from 1260.08 on September 1 to 1256.04 on September 30.

INSURANCE

• The Insurance Regulatory and Development Authority (Irda) has given its approval on the Reliance Capital’s proposal to acquire 100 per cent stake in Chennai-based AMP Sanmar Life Insurance. Reliance Capital will soon enter into a final share purchase agreement with AMP Sanmar. Reliance Capital has already applied for renewal of its licence under Reliance Life Insurance.

CREDIT  RATINGS

o       Icra has assigned an ‘LAAA’ rating to the proposed Rs. 8 billion subordinated bonds programme of Canara Bank. The rating take into account Canara Bank’s strong retail and corporate franchise, steady profitability levels, low cost deposit base, satisfactory capitalisation and its comfortable liquidity position.

o       Icra has rerated the rating assigned to the Rs. 300 million non-convertible debenture programme of Balrampur Chini Mills Limited (BCML) at ‘LAA’; the agency has also reaffirmed the ‘A1+’ rating assigned to the Rs. 2 billion short-term debt/commercial paper programme of BCML. The rating action factors in the company’s dominant size in the business, operating efficiency as well as the improved realisations and profits in the sugar business and the positive outlook on the sector in the medium term.

o       Icra has reaffirmed the ‘A1+’ rating assigned to the Rs. 100 million short-term debt programme of Munjal Auto Industries Limited (MAIL). The rating takes into account MAIL’s favorable position as a group company of the Hero group which has aided the company in improving its market share with its main customer, Hero Honda Motors (HHML), on a sustained basis and low financial risk profile supported by its high operating profit margins relative to competing industry players.

o       Icra has placed the ‘LBBB+’ and ‘MA’ ratings assigned to Television Eighteen India Limited’s (TEIL) PCD and FD programme, respectively, under rating watch with developing implications. The rating action follows the issuance of notice by the Ministry of Information and Broadcasting (MIB) to TEIL asking it to comply with the uplinking guidelines latest by September 30, 2005.

o       Crisil has upgraded the rating assigned to Jindal Saw's FD programme, from 'FA/Rating watch with positive implications' to 'FA+/Stable'. The upgradation has been done in the anticipation of a reduction in the company's outstanding debt following the success of Jindal Saw's GDR issue of US$ 65 million.

o       Crisil has assigned ‘AAA’ rating to the Rs. 3 billion non-convertible debenture programme of CitiFinancial Consumer Finance India Limited. (CCFIL), the rating takes into account CCFIL’s 100 per cent ultimate ownership by Citigroup Inc. (rated ‘AA-/Stable/A1+ by Standard and Poor’s) as well as the strategic importance of CCFIL to Citigroup Inc’s India business plan.

CORPORATE SECTOR

• Hindustan Construction Company has got order of two projects from the National Hydroelectric Power Corporation. The combined value of the project is around  Rs 1080 crore. These are the Uri-II Hydroelectric project in Jammu and Kashmir and the Chamera Hydroelectric project in Himachal Pradesh

• Bharat Petroleum Corporation Limited (BPCL) has decided to set a joint venture with GAIL India for the distribution of gas in Maharashtra , excluding Mumbai. BPCL and GAIL are expected to hold 22.5 per cent share each in the company and 5 per cent of share will be with the state government. The company will be registered under the name of Maharashtra Natural Gas Limited (MNGL).

• GAIL India has entered in the polyethylene market; it has started production of the product at its petrochemical plant at Pata in Utter Pradesh

• Garware Shipping Corporation is planning to acquire three Platform Supply Vessel (PSV) at the cost of Rs 275 crore. These vessels would be deployed to support offshore oil and gas exploration activities. The company has signed the agreement with Solstad Shipping a Norwegian company for a PSV at the cost of Rs 81.5 crore.

• Tata Teleservices has singed Rs 1000 crore outsourcing agreement with Tata Consultancy Services (TCS). Under the five-year contract, TCS will provide IT infrastructure management to Tata Teleservices and Tata Teleservices Maharashtra.

• Dr. Reddy’s Laboratories (DRL) has announced setting up of a drug development company, Perlecan Pharma, with private equity participation from ICICI Venture capital and Citigroup Venture capital International Mauritius. DRL will have a 17 per cent equity holding, while the tow venture capital companies will hold 42.5 per cent each in Perlecan Pharma.

• Indian Rayon has announced acquisition of 16.5 per cent share in Idea Cellular from Cingular Wireless for nearly Rs 660 crore.

• Oil and Natural Gas Corporation (ONGC) will set up two pilot projects for underground coal gasification with Neyveli Lignite Corporation limited and Coal India limited.

• Toyota Kirloskar Motors has decided to expand its Indian operation by setting up a second plant in Karnataka at a cost of Rs 1400 crore. Toyota already has its car manufacturing plant in Bidadi near Banglore.

• Mahindra and Mahindra is planning to set up a manufacturing factory in Malaysia and Russia for utility vehicles. The company has been exporting Scorpio utility vehicles to these two markets and based on the response it will be setting up a manufacturing factory in these countries.

• Fortis Healthcare limited has acquired 90 per cent share in Escorts Heart institute and Research Centre for Rs 585 crore. With this deal Escorts will exit the health care business.

• Pfizer limited has declared a 62.4 per cent rise in its net profit to Rs 21.8 crore for the third quarter ended August 2005 as compared to Rs 13.4 crore for the corresponding quarter of 2004-05.

LABOUR

o       The left has shown discontent over the non-fulfilment of the promise made by United Progressive Alliance (UPA) government regarding discontinuing the present ‘fix term employment’. The term ‘fix term employment’ was conceptualised during the previous government to hire people temporarily. It was assured by the ministry of Labour and Employment in July 2004, that the new classification of fixed term employment of workmen in Industrial Employment Act 1946 had been reviewed. However, the leftists have complained that this has not been withdrawn yet.  

o       The Pension Fund Regulatory Development Authority (PFRDA) is planning to introduce a massive campaign at the regional level to create awareness about the new pension system (NPS), once the bill is passed in the parliament. The awareness of the programme would aim to make general public understand the nitty gritty of the proposed scheme. The PFRDA has not yet officially launched a campaign, as certain basic issues like the number of pension fund managers and their minimum required capital are yet to be finalised. So far, 14 states have joined new scheme and meanwhile, the PFRDA has already put out the first draft based on the parliamentary standing committee report on NPS. According to the present guidelines, there would be four investment options to subscribers, wherein one of them would have a provision to invest 100 per cent in government securities.

SOCIAL SECTOR

·        Education

o       The Union Human Resource Development (HRD) Ministry’s plan to make universalisation of secondary education as one of the major Eleventh Plan (beginning from 2007) initiatives, has got a momentum due to the Prime Minister’s approval of a Planning Commission’s proposal to adopt the mission to meet growing demand for secondary schooling. The Planning Commission had suggested extending the provision of secondary education along with the provision of elementary education through ‘Sarva Shiksha Abhiyan’ (SSA). It is estimated that 22 million students would be eligible for secondary education by the end of this decade. Though universalisation of elementary education is still five years away as per the SSA target, the Ministry of HRD has suggested that the government should not wait for 2010 to draw up roadmap for universalisation of secondary education. The Central Advisory Board of Education committee entrusted with the task of drawing outline for universalisation of secondary education has also supported this. Apart from the approval to universalise secondary education, the Planning Commission has also made proposal to fund higher education as a part of Eleventh plan and this too has been approved by the prime Minister.

·        Health

o       The Prime Minister in his address at the All India Institute of Medical Sciences (AIIMS), has expressed serious concerns over the fact that the Indian health indicators were the worst in the world and therefore, assured for huge investments in the health sector. He added that increase in the health expenditure would help to attain goals of economic development in future. He mentioned that the bulk of the provision of the basic healthcare services, particularly for the poorer sections of the society will continue to be in the public domain. On the other hand, the expansion of private healthcare services would address the needs of the affluent and those covered under the medical insurance. 

• Housing

• The Reserve Bank of India ’s (RBI) hunch of an impeding crisis in the domestic housing finance market may be true in the case of public sector banks. Though their non-performing assets (NPAs) are generally on the decline, those emanating from housing loans are on the rise. According to the recent study conducted by CrisilInfac, the information and research arm of Crisil, based on the data provided by National Housing Board (NHB), gross NPAs of the housing finance segment of all players went up from 2.67 per cent in 2001-02 to 2.77 per cent in 2002-03, and are estimated to have increased further to 3.17 per cent in 2003-04. Data for 2004-05 has not been released by NHB as yet. Due to stiff competition, a number of players are relaxing various norms and taking a higher exposure by increasing the loan-to-values. The general nature of such relaxation leads to fabrication of documents such as income tax returns, encashment of loan cheque/demand drafts by third party, forged stamp documents, mis-representation of end-use of loans and multiple financing.

EXTERNAL SECTOR

o       According to the World Investment Report 2005 released by UNCTAD, India has emerged as one of the three most attractive destinations for FDI inflow. A survey carrying response from transnational corporations puts India as the most attractive global business destination after China . In another survey of experts, India was placed third after China and the US . The report also reveals that foreign direct investment (FDI) flows to India, which jumped by 48 per cent in 2004 to touch $5.3 billion, are expected to keep increasing in the current year especially in the steel, telecommunications, infrastructure and financial sectors.

o       Another controversy regarding data authenticity, witnessed in May as well, has again erupted. There is again a mis-match between the garment export data as given by Directorate General of Commercial Intelligence and Statistics (DGCI&S) and those given by textile ministry, for January-June 2005. A committee formed under the Apparel Export Promotion Council (AEPC) and Cotton Textile Export Promotion Council (CTEPC) of the textile ministry has found a 54 per cent surge in garment exports. DGCI&S data, on the other hand, shows a mere 11.17 per cent rise. AEPC and CTEPC collected data from the four major ports of the country for the period. Although the DGCI&S figures are more extensive as they cover all the ports in the country, the four ports that were studied by AEPC and CTEPC account for a considerable share of exports.

o       The controversy in May pertained to textile exports to the US and EU, during January-March 2005. DGCI&S had then said export had declined by 24 per cent. However, import data from the US customs had showed a 34 per cent growth during the period and the EU customs had put growth at 10 per cent in January and 14 per cent in February.

o       The European Union became the largest importer of India ’s marine products in 2004-05 surpassing the US , with total exports to the EU valued at $405.4 million as against $345.52 million to the US .

o       India ’s total international reserve assets have exceeded the entire debt liability of the country by around $ 18 billion for the year ended 2004-05. Also the net international investment position (stock of external assets less stock of external liabilities) has increased by $6 billion for the year ended 2004-05.

o       India ’s trade prospects with Asean countries such as Thailand , Malaysia , Philippines and Vietnam will suffer significant jolt because of protective measures which are unlikely to be lifted until the free trade agreement (FTA) between India and Asean is executed by 2012. However, Singapore will emerge as a major trade partner for India in the Asean group in services, banking and legal professions. These findings have been made in a study conducted by Assocham on ‘India-Asean FTA: business complementarities, trade advantages and rules of origin’, which has been submitted to the ministries of commerce and finance. According to the study, while India and Asean signed an FTA in 2003 and the former has already started rationalising its tariff structure by bringing them down from 40 per cent to 20 per cent, Thailand, Malaysia, Philippines and Vietnam have not yet responded by rationalising their protective measures against India’s exports in areas like transport and electric equipment, copper products, polyethylene, textiles, cement, rubber, tea, steel, dairy products and refined sugar. These countries continue to impose tariff barriers on the above mentioned items of Indian exports ranging from 17.6 per cent to 47.6 per cent. In textile and watches segment, the tariff exceeds even 50 per cent, while on an average India ’s tariff structure against these countries does not exceed 20 per cent.

o       With the dismantling of quota regime in January 2005, Indian textile exports are set to exceed 60,000 crore by the end of 2005, an increase of over 25 per cent as compared to last year.

o       The export sector was estimated to have generated 14.85 lakh additional direct employment during 2004-05, stated a study by the Research and Information system for developing countries (RIS). The overall merchandise export activity now sustained nearly 16 million jobs, the study said.

o       India plans to import one million tonne of liquefied natural gas (LNG) for a year from Qatar to restart the Dabhol power plant. According to oil ministry official India will import one million tonne per year from the middle of 2006.

o       The Union minister for food processing industries is in favour of 100 per cent foreign direct investment in agri-business, so as to accelerate its growth to about 10 per cent in the next decade.

o       Delhi-based construction company DLF plans to set up half-a-dozen IT SEZs across the country, including one each in Delhi and Chandigarh . The company is planning investments of Rs 600 crore in SEZs.

o       The nation-wide strike called by trade unions on the 29^th of September caused minor disruption in export activities, as exporters were not able to send their consignments by air.

TELECOM

• Private operators have for the first time overtaken the two PSUs, MTNL and BSNL in installation of new public call offices (PCOs) in the country. During April to June, private operators such as Reliance Infocomm, Tata Teleservices and Bharti Tele added more than 150,000 PCOs across the country, compared with a little over 21,000 for BSNL. Additionally, according to the latest figures, BSNL’s market share in this segment has fallen from 73 per cent in September 2004, to around 65 per cent in June 2005.

• Reliance Infocomm added 105,783 new PCOs, while Tata Teleservices added over 40,020 during April-June quarter. The country currently has around 3 million PCOs, as against 2.3 million at the end of 2004.

*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

We will be grateful if you could kindly send us your feed back at epwrf@vsnl.com