Current Economic Statistics and Review For the Week 
Ended October 15, 2005 (42^nd Weekly Report of 2005)

I

Theme of the week:

Gold: Need For Moderation in its Demand*

As per the World Gold Council (WGC), the first quarter of 2005-06 India saw the highest ever quarterly demand for gold, both in tonnage and rupee terms. The 277 tonnes offtake has exceeded the exceptional high levels seen in the first quarter of 1998, that is, immediately after import liberalisation. This is happening at a time when stock markets are buoyant and the inflation is ruling low. Thus, the conventional argument put forward for investments in gold as a hedge against inflation stands refuted. Also, with the BSE sensex ruling at unprecendented levels offering very high returns surpassing those on almost all types of investments. What is worrying is the encouragement that the policy makers are giving which is leading to these unprecendented levels of gold imports for consumption regardless of its widespread economic and social implications. However, various policy measures to boost gold jewellery export in the recent years has seen a sharp rise ---.

Impact of Gold Liberalisation: External Sector

In 1991, reforms were introduced for gold imports liberalisation. The supporters of gold import liberalisation in the early 1990s argued that it was justified on grounds that it will curb smuggling and consequently the Hawala market and also generate some revenue for the government. In 1947, despite the ban on gold imports, net imports (practically all of it illegally smuggled) increased progressively from around 31 tonnes in 1930s to 89-90 tonnes per annum in 1950s. After a sharp decline in the 1970s, gold imports surged again in 1980s and following the permission to import gold in 1992, the rate of imports increased sharply in the 1990s. Reflecting the impact of a series of policy measures undertaken in the post-reform years starting with the repeal of Gold Control Order in 1991 for liberalising the imports of gold and silver, these imports showed a sharp rise. In order to curb illegal practice, gold import of gold was officially allowed through NRI route in 1991. This resulted in a massive inflow of gold, which jumped to about 435 tonnes including 100 tonnes via smuggling. In 1997-98 the banks were granted permission to import gold under open general licence (OGL). This liberalisation of gold import has resulted in a sizable import of gold over the years. In fact, the immediate result of such a policy was a sharp rise in non-oil imports of the country (1998-99) by 15.7 per cent due to a spurt in the imports of gold and silver. Non-oil imports, net of gold and silver imports, registered a rise of just 6.3 per cent as compared to a higher growth rate of 11.9 per cent during 1997-98 that is before introduction of OGL. As a Gold Council study (2004) states, “India saw an enormous leap in its gold consumption after liberalisation from 200 tonnes to between 500 and 600 tonnes a year, subsequent to official deregulation from 1990 onwards. In 2003 India took 565 tonnes – against China’s 208 tonnes.” And now for 2004-05, official imports have worked out to about 770 tonnes. Apart from the OGL system, gold import has been promoted by the unduly low level of import duty. In January 1999, the duty was raised from Rs 250 to Rs 400 per 10 grams. Due to tremendous trader pressure, it was again reduced to Rs 250 in February 2001 and further to Rs 100 in February 2003. India has always been one of the largest consumer of Gold, however, it would not be wrong to say that official encouragement in the post-liberalisation period has resulted in a quantum leap in imports. As the country does not produce any gold, the entire requirement is imported (except 2 tonnes or so) and its share in total imports has risen from 8.3 per cent in 1999-00 to 9.6 per cent in 2004-05.

Gold, by itself, does not add much to production or productive capacity. However, the foreign exchange used for its import in effect reduces the availability of precious foreign exchange for other imports (such as raw materials, machinery etc.) which are not only required for the current production but also to add to the productive capacity. Table 1 shows that the magnitude of foreign exchange spent has almost more than doubled in a span of five years. Foreign exchange spending on gold imports reached its peak in 2004-05 when $10,280 million was exhausted to support gold imports. This is even higher than the foreign exchange spent on imports of machinery ($10,710 million) ¹. 

What is even more interesting is that while the capital goods have to bear VAT of 4 per cent, gold is levied a special rate of only 1 per cent. This kind of encouragement to gold is detrimental for the growth of the economy. Also, the life savings medicines are covered in the 4 per cent tax slot, which is nothing but an injustice.

There has been a big spurt (about 80 per cent) in the estimated consumption following the liberalisation of gold imports in 1992. Consumption seems to have remained around 400-450 tonnes for next few years. Estimated consumption in 1998 was more than thrice the level recorded in 1990 and nearly 70 per cent higher than in 1992. (A Vaidyanathan). 

 Gold Investments: Reasons and Contradictions

An important characteristics of gold, is that it is a highly liquid store of value. It represents command over resources both at home and abroad which can, in principle, be invoked whenever necessary. Its physical depreciation is negligible; and it can be readily converted into cash by sale in the world markets. Though it does not earn any interest and though it is not any longer used as the standard for fixing currency values, the fact that there is a well developed world market for it and that its price have generally been more attractive than others. In so far as gold is used as an ornament, it can be treated as a durable consumer good. But this does not in any way dilute its advantages as a liquid, risk-free assets. Instead, it’s also used extensively as a collateral especially in cases wherein banks are not willing to lend. For instance, despite so much focus on housing, for chawl resident, banks do not provide loans; as a result, they have to effectively use gold. This reflects a lacuna in our credit delivery system. Also, given the small-scale nature of gold industry, it is labour intensive and employs more than 3 million people.       

          Gold as an investment option has been popular now for many years, as the returns on gold are considered to be better than that on other comparable instruments.  This is considered to be so particularly, due to the prevailing soft interest rate regime and subdued stock markets, which have pushed investors towards gold purchases as they are still considered to be more safe and attractive returns avenues of investments. Serious econometric studies have sought to explain the behaviour of gold imports in the form of differential behaviour between domestic and foreign gold prices and that between gold and domestic share prices (Vaidyanath 1999), but recent upsurge in gold imports cannot be explained by these factors, for, in the first place, the spread between domestic and international prices of gold has narrowed rather considerably and secondly, domestic share prices have risen at a much faster rate than gold prices (Money Market Review, EPW June 18, 2005).

As mentioned in RBI Bulletin (2005, June), the demand for gold is sensitive to, inter alia, gold prices, the macroeconomic environment, rural incomes, returns on alternative investments such as bank deposits, government bonds, stock prices and seasonal demand emanating from marriages and festivals. However, WGC has said in 2004, that “not only did consumers become comfortable with prices in excess of $ 400 /oz but during the second half of the year they increasingly began to expect prices to rise further. Thus the increases in prices, which persisted throughout most of the final months of the year, did not prove too great an obstacle to buying – a market contrast to normal behaviour in this market”. This point is supported by data presented in Table 2, where demand for gold has risen in tandem with its prices.   

Gold constitutes an important component of household saving and the most preferred investment behind bank deposits, especially in rural areas (RBI bulletin). The bulk of demand from rural areas is for plain 22 carat and not for different varieties. This is partly attributed to the social obligations and partly due to the paucity of investment options. In rural areas, the investment options are severely restricted mainly to postal savings, life insurance schemes and gold purchases. With the banks closing their rural branches, the investment options have narrowed further; the situation has particularly worsened in the post liberalisation phase. Ushering changes in the mindset is one of the most difficult activities and this is even more so in cases where the issue is woven around status symbol. Hence, in the short-run, it is not possible to shift people’s preferences away from gold to other investment avenues. However, social norms and values are not quiet devoid of rational calculus and so it is not inconceivable to lure people away from gold in presence of better investment opportunities. But, this again does not seem feasible because in this new milieu of financial sector reforms, the focus on rural branches or tapping the rural markets has been related and no specialised attention is given to this fact. This partly explains the huge demand for gold in the rural areas. However, in case of urban areas, the upsurge in middle-class incomes has increased their propensity to buy more gold.

With the reform of the financial sector and development of the financial markets, it was expected that demand for physical gold as a form of insurance-cum-investment would reduce. However, it has been found that the demand for gold has continued to surge. Its not just about the availability of financial instruments in the non-government financial sector but also its reach and ability to tap the idle gold with households.  With a view to reduce the import of gold in the long run in 1999-00, the Gold Deposit Scheme 1999 was launched to draw out privately held gold stocks and reduce India’s dependence on imports. Under the scheme, investors deposit gold with banks and receive fixed term interest bearing certificates or bonds in exchange. On maturity, the depositor could take back their gold or its equivalent in rupees.  However, the scheme failed to elicit active investors interest, as the coupon rates were fixed and were not dependent on the movement of gold prices, as a result, the returns remained low. Also, its marketing was not sufficiently adequate.  

It is expected that gold jewellery exports would touch $ 5 billion in this fiscal year, by registering a growth of over 30 per cent. Between April-September 2005, exports have touched $ 1,645 million as compared to $ 1,576 million. While inaugurating the “Festival of Gold 2005” being organised by MMTC, Kamal Nath, minister for commerce and industry, said that the government had evolved a medium –term plan to enhance the export of gold jewellery, which contributes to about 18 per cent of the country’s total gem and jewellery exports” (Table 3). This in turn is almost 17 per cent of the total country’s export. The government has taken various measures like hallmarking and certification of goods towards development of an Indian brand in the jewellery market. The ministry has also constituted a committee to examine the regulatory structure of the gold industry and to recommend appropriate policy measures required to develop India as a gold manufacturing and trading hub. Establishment of Gold Trading Centre in India is expected to generate revenue for the government, increase the employment potential of the country and stabilise commercial trade in gold.  It is true that India’s jewellery industry is historically one of the most dynamic and widespread, given an opportunity it is capable of exploiting international markets and emerge as a own brand owner. This is due to the easy availability of cheap and skilled labour. In this context it is found that India has already an export level of gold jewellery to the extent of $ 3.8 billion that is nearly 40 per cent of $10 billion gold imports.

Though India is the largest consumer of gold, it is price taker and not a price maker. This is a unique monopsony situation, wherein some 20 banks are carrying out purchases but are unable to exert pressure on prices. Despite, its presence in the market, India does not feature among major trading centres like Dubai Exchange.

            Further, it was expected that lifting the ban on forward trading would help to bring down the hoarding demand and help in bringing the idle gold into the market/official pool. Following the permission given to forward trading in commodities, the gold futures have been traded on Multi Commodity Exchange (MCX) from November 10, 2003 and on National Commodity Derivative Exchange (NCDEX) on December 15, 2003. However, among them, the bulk of trading in gold is carried out on MCX. During the period January – August 2005, the one-sided monthly trading on gold has ranged between Rs 5,496 crore and Rs 10,430 crore (Table 4). Interestingly, during this period, imports have also been huge notwithstanding the expectation from this market.

Conclusion

It has been argued that free import of gold is necessitated by the need to curb hawala in foreign exchange and to encourage NRIs to remit foreign exchange through official sources (EPW Editorial of June 20, 1998). But the operation of a controlled regime on the external sector front, which provided incentives for hawala and unofficial remittance, is a thing of the past. With a paradigm shift in policy, there are no incentives for such operations anymore. The rupee exchange rate is freely determined by the inter-bank market and the current account has been made freely convertible.

Therefore, in the present policy environment, it should be possible to restrain gold imports, which is imperative from many macro-economic considerations, by a coherent gold policy. While the imposition of controls on gold imports may not be available, a combination of policies may be pursued consistent with an environment of policy reforms. Sizeable increase in import duty and imposition of wealth tax seem to be the obvious candidates. The weaning away of people from gold to financial assets, while it is the answer in the long run, can only be a gradual process. In this respect too, a healthy capital market with vigorous regulations curbing unhealthy practices may go a long way. Also, it remains unanswered, the justification of bring in price parity between the domestic and international for the benefit of the economy. Instead, it seems that this has fuelled only the consumption tendencies and has serious implications on the economy.  

End Note

¹As is seen in Table 1 gold imports (foreign exchange spent) have stagnated between 1999-00 and 2002-03, which seems to be the result global recession. In the middle of 2002-03 world economy started looking up and this is reflected in rise in gold imports thereafter.

Reference 

Economic and Political Weekly (1998), Editorial: “Gold, Not the Whole Story”, EPW, Vol XXXIII no 25

Economic and Political Weekly (1998), Editorial: “Gold, High Cost of Imports”, EPW, Vol XXXIII no 39

Economic and Political Weekly Research Foundation (2005), Money Market Review: “Burden of Gold Imports”, EPW, Vol XL no 25

RBI (2005): “India’s Foreign Trade”, RBI Bulletin, June.

 Vaidyanathan. A (1999): “Consumption of Gold in India, Trends and Determinants” EPW, Vol XXXIV no 8

*(This note is prepared by Piyusha Hukeri and Abhilasha Maheshwari) 

Highlights of  Current Economic Scene

AGRICULTURE   

• The total import of sensitive items for the period April 2005 -July 2005 has fallen by 5.4 per cent to Rs.4, 864 crore as compared to Rs.5, 143 crore during the corresponding period of last year. Imports of edible oil, milk & milk products and rubber have shown a decline at broad group level during the same period. Although the import of crude oil has gone up by 4.6 per cent, that of refined oil has gone down by 73 per cent. In the edible oil section, the import has decreased from Rs.3328 crore in the last year to Rs.2382 crore for the corresponding period of this year. The decline in edible oil import is mainly due to huge shortfall in import of RBD Palmolein, which has gone down by 63 per cent and other refined Palm oil, which has gone down by 83 per cent.  

o       An increase in domestic demand for silk has seen a surge in imports of silk yarn and fabrics, primarily from China , to Rs 319 crore in the first four months of this fiscal year 2005-06. As per the data provided by DGCIS, this is an increase of 82.4 per cent from Rs 174.92 crore a year ago. Imports of Chinese fabrics are expected to double in the current fiscal if central government does not impose anti dumping duty. However, Central Silk Board (CSB) has already initiated steps to impose anti-dumping duty.

• National Collateral Management Services Ltd (NCMSL) has planned to launch a satellite laboratory in Jodhpur , Rajasthan for testing commodities like cummin seed, guar gum and guar seed. This is the third satellite laboratory in the series followed by Unjha of Gujarat and Mumbai. NCMSL also plans to setup two more laboratories, depending on the production output and seasonal changes. The company would be starting ‘disposal services’ to help farmers, processors or traders who want to sell their commodity for cash emergency.

o       India has rejected the latest EU and US proposals on farm tariff cuts, affirming developing countries’ stand. The US – Australia proposal of ‘progressivity within a band’ and the EU formula of a ‘pivot within each band’ for tariff reduction in agriculture would have been disadvantageous to the developing countries. US proposal has been rejected on the ground that ‘progressivity within a band’ is nothing but the Swiss formula, which G-20 group has already rejected. EU’s suggestion of flexibility in the market access formula around a ‘pivot’, that is the average rate of cut in each band, has been discarded since it would have obstructed the market access for the exports of developing countries.

INDUSTRY

·        Overall

• Industrial growth has slipped to 7.4 per cent in august 2005 as against 8.6 per cent in the same month of the previous fiscal year. In the same period the manufacturing sector has slowed down to 8.2 per cent from 9.1 per cent a year ago while mining growth has fallen by 1.3 per cent compared to 4.4 per cent growth in the August of last fiscal year; and electricity sector grew by 7.8 per cent as compared to 7.4 per cent last year.

·        SSI

• The central government is in the process of formulating a new promotional package for Small and Medium Enterprises SMEs to help them achieve their full growth potential by providing them with adequate incentives for technology upgradation, infrastructure and marketing facilities.

·        Automobiles

• The sales of domestic passenger vehicles crossed the one-lakh units a month mark for the first time in the month of September 2005 on the back of traditional festival season demand, hefty discounts and corporate purchases. There has been a 9.8 per cent growth in sales of passenger vehicles in September 2005, of which utility vehicles grew at 7 per cent and multi-purpose vehicles at 4 per cent.

INFRASTRUCTURE

·        Energy

o       A revised petroleum and natural gas regulatory board bill, 2005, which will be introduced in the parliament in the winter session, has already been vetted by the law ministry and approved by the committee of secretaries. As per the bill there will be a common appellate tribunal for power, petroleum and natural gas sectors; downstream issues will be regulated under the bill while the directorate general of hydrocarbons will administer the upstream sector; central and state governments will be authorised to give exploration and mining licenses; and technical and fiscal regulations will be governed by the provisions of production sharing contracts signed under the new exploration and licensing policy.

·        Petroleum and Petroleum Products

• GAIL and IOC have set up a joint venture, Green Gas Limited, for supplying LPG and CNG in Lucknow and Agra . Both companies will hold a 22.5 per cent equity stake each in the JV, while the state industrial development corporation will hold 5 per cent and the remaining 50 per cent will go to the private sector.

• India will get 100,000 barrels of oil per day beginning 2007 from Sakhalin-I oil and gas fields in far eastern Russia , which began producing oil and gas this month. This will be India ’s first shipment of equity crude from Russian oilfields, where ONGC Videsh Limited has 20 per cent stake, which entitles India for 50,000 barrels per day (bpd) of peak output of 250,000 bpd. Apart from that, India would also get Rosneft’s share till the Russian company repaid the loan given to them by OVL to fund the company’s 20 per cent stake in the project.

• The petroleum ministry has decided to do away with licences for marketing oil, with companies now requiring mere registration after meeting certain criteria set by the government, the shift from authorisation to registration indicating the end of discretionary powers of the petroleum ministry. The proposed petroleum regulatory act will also review the entry barrier of Rs 2000 crore investment in the sector to enter the domestic petro-retailing business.

·        Coal

• The coal ministry has deferred introducing competitive bidding for the auction of coal blocks and has invited applications for 20 coal and 8 ignite blocks for captive mining, though it comments that they will soon execute plans of competitive bidding for mines, aligned with provisions in the new exploration policy.

·        Roads

o       In order to boost private sector participation in the road sector, the government is considering plans bifurcation of the build-operate-transfer (BOT) scheme based on the risk profile of a project so as to give the private developer the option to take a higher risk exposure or pass it to the national highway authority. Projects would be classified as tier I – high traffic density and lower risk, where the private operator will take on the risk of the project; and tier II – low traffic density and high risk, where NHAI will bear the risk and offer an annuity scheme to the private developer wherein the developer would be reimbursed the difference between the projected traffic density and the actual traffic movement on an annual basis.

INFLATION

o       The annual point-to-point inflation rate based on wholesale price index has gone up to 4.24 per cent during the week ended October 1, 2005 from 3.97 per cent registered during the previous week. The inflation rate was at 7.15 per cent in the corresponding week last year.

o       The WPI in the week under review has risen by 0.2 per cent to 196.9 from the previous week’s level of 196.5 (Base: 1993-94=100). The index of primary articles’ group has increased considerably by 0.7 per cent to 194.6 from the previous week’s level of 193.3, due to a considerable increase in the price indices of food articles by 0.8 per cent to 197.1 from 195.5. The higher prices of food articles have been evident due to the higher prices of fruits and vegetables, arhar, bajra and eggs. The index of ‘fuel, power, light and lubricants’ group has risen marginally by 0.1 per cent to 315.0 from the previous week’s level of 314.6 due to higher prices of aviation turbine fuel, bitumen and naphtha. The heavy-weighted manufactured products’ group constituting 63.7 per cent of total weight, has also risen marginally by 0.1 per cent to 171.3 from 171.2 of the previous week’s level, primarily due to increase in the prices of  ‘leather and leather products’ and base metals. 

o       The latest final index of WPI for the week ended August 6, 2005 has been revised upwards; as a result both, the absolute index and the implied inflation rate moved up to 194.9 and 3.78 per cent instead of the provisional levels of 194.1 and 3.35 per cent, respectively.

o       The high base effect has been at the forefront in bringing down the headline inflation rates in the past couple of months. However, the rate of inflation has now gradually started inching up due to the reducing impact of high base effect. The 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 asked the companies that have borrowed long-term foreign currency funds either through loans or equity to disclose the end-use of such funds. Details have been sought on funds raised through external commercial borrowings (ECBs), foreign currency convertible bonds (FCCBs), American Depository Receipts (ADRs) and global depository receipts (GDRs) to the extend of $50 million and above.  According to banking sources, the RBI’s move follows apprehensions that some corporates may have deployed funds raised in the equity market. The sources said some firms were raising “lien” against foreign currency loans parked overseas. In other words, they are raising funds in the domestic market by using overseas loans as collateral. The domestic fund might have found their way into the equity market. In effect, the corporates are using one loan as collateral for raising another.

• Buoyed by robust revenue from its corporate banking operations, Yes Bank has posted a net profit of Rs.14.25 crore for the quarter ended September 2006 as against a loss of Rs.1.74 crore in the corresponding quarter last year. Yes Bank that commenced its operations in October 2006 registered a 1028 per cent jump in its total income to Rs.41.87 crore as compared to Rs.3.71 crore in the previous year.

• Yielding to the long-standing demand of the banking industry, the Reserve Bank of India (RBI) has permitted banks to treat the entire balance held in their Investment Fluctuation Reserve as Tier-I capital. Banks would, however, be required to have a capital of atleast 9 per cent of the risk weighted assets for capital and market risks for both, “held to maturity” and “available for sale” category as on March 31, 2006. The move will provide a huge relief to banks and ensure a smoother transition to Basel-II compliance norms.

PUBLIC FINANCE

o       The empowered committee on VAT has clarified that VAT on supplies to special economic zones and export oriented units will stay and has asked the taxpayers to claim credit on VAT instead of demanding outright withdrawal of the levy.

FINANCIAL  MARKET

·        Capital Markets

§         Primary Market

o       Gujarat Industrial Power Co Ltd (GIPCL) has tapped the market through issues of equity shares of Rs 10 each in a price band of Rs 63 and Rs 73 per share through 100 per cent book building process.

o       Bannari Amman is making a public issue of 70 lakh shares of Rs 10 each in a price band of Rs 115 to Rs 135 per share through 100 per cent book building process. The issue is to remain open for subscription between October 19 and  25.  

§         Secondary Market

o       Trading continued to remain bearish at the stock exchanges for the two consecutive weeks. The depreciation of the rupee has been considered to be the main reason for the bearishness as the overseas funds have been selling stock aggressively and pumping money out of the country. In fact, the net outflow through portfolio investment is considered to be one of the primary reasons for the recent slide of the rupee. Also, the recent slide in the stock exchanges has corrected to some extent the overvaluation factor and if the bearish sentiments continue then the long-term investors would be attracted as the fundamentals of the economy continue to be robust.

o       Despite the weakness in the market, Infosys has managed overcome the bearish trend and ended the week with 1 per cent gains. This could be attributed to the strong set of numbers delivered by the company for the second quarter ended September 2005. Stable-to-positive billing rates, strong volume growth and traction in key service lines led to a strong double-digit sequential topline growth for the quarter, despite the strong hiring.

o       The FIIs after have invested about US $ 8.6 billion (Rs 37,500 crore) in Indian equity markets during January – September 2005, they have turned net sellers offloading shares worth Rs 1,000 crore in the last nine trading days. This is despite the strong economic fundamentals as reflected by the robust first quarter GDP growth rate of 8.1 per cent, steady interest rates and most important, the impressive second quarter results.

o       Mutual funds during the period between October 1 and 13 have made investments of Rs 342.71 crore with purchases of Rs 3035.87 crore and sales of Rs 2693.16 crore. 

o       As per the data put out by Emerging Portfolio Fund Research (EPFR) on October 12, there have been outflows from emerging market equity funds for the first time in 10 weeks. The outflows are attributed to the sudden wave of risk aversion and worries that slowing growth and interest rate increases in the US may lure away capital from emerging markets.  However, EPFR has said that Asia ex-Japan has recorded inflows because of fresh money flowing in to Indian markets.

·        Derivatives                                  

o       Sebi appointed secondary markets advisory committee (SMAC) has recommended a five-fold increase in the member-wise exposure limit in the futures and options segments.

o       With the increase in cash market volatility, the derivatives market trading improved and during the week ranged between Rs 14,564 crore and Rs 21,872 crore.

o       Nifty futures, after a long interval, have moved into premium zone; this could be due to the short covering activity of the market participants.

·        Government Securities Market

§         Primary Market

o       On review of the current borrowing requirements of the government, the RBI in consultation with the government has cancelled the auction of dated security auction scheduled for October 18-25 for an amount of Rs 4,000 crore.

o       The yield set at the 19-day treasury bill auction has increased from 5.41 per cent in the previous week to 5.49 per cent.

§         Secondary Market

o       The call rates ruled easy for the most part of the week. Banks refrained from building positions in the market ahead of the monetary policy review and this resulted in lower demand for funds. Liquidity improved in the system as reflected by the increase in the size of bids tendered under the LAF reverse repo.

o       The market sentiments remained cautious due to the upswing in international crude oil prices and concerns of its supply in the approaching winters. However, as the government cancelled the scheduled auction, the market sentiments turned buoyant. Despite, the rise in inflation rate, the weighted YTM of 8.07 per cent 2017 has eased from 7.27 per cent on October 7 to 7.24 per cent October 14.

·        Bond Market

o       To ensure smooth transition to Basel II norms, the RBI has permitted commercial banks, which have maintained a capital of at least 9 per cent of their risk weighted assets for both credit and market risks under ‘held for maturity’ and ‘available for sale’ as of March 2006, to treat the enrite balance in investment fluctuation reserve (IFR) as Tier –I capital. 

·        Foreign Exchange Market

o       The rupee depreciated against the dollar due to FII outflows and the strengthening dollar against the major currencies such as euro and yen. However, it is said that the RBI intervened in the market through the state run banks, which helped the rupee to recover some losses.

o       The six-month forward premia has eased from 0.79 per cent on October 7 to 0.47 per cent on October 14.

·        Commodities Futures

o       NCDEXAGRI index during the week under review has ruled in a narrow range of 1283 to 1288 points.

CREDIT  RATINGS

o       Icra has assigned an ‘LAA’ rating to the fresh Rs. 750 million non-convertible debenture programme of Tata Coffee Limited (TCL). The rating takes into TCL’s integrated nature of operations in the coffee business and the expected increase in the share of value added products through the freeze dried instant coffee project, the firm trend in coffee bean prices, favourable financial risk profile, comfortable liquidity position and its strong parentage.

o       Crisil has assigned a rating of ‘BBB/Stable’ to Victor Gaskets India Limited (VGIL) Rs. 100 million non-convertible debenture programme. The rating reflects VGIL’s established business relationships with leading Indian original equipment manufacturers (OEMs), technological collaboration with Dana Corporation, U.S. , and improving financial risk profile

o       Crisil has assigned an ‘AA-/Stable’ rating to Gujarat Fluorochemicals Limited’s (GFL) Rs. 1.5 billion non-convertible debenture programme. The assigned rating reflects GFL’s established position in the refrigerants market, its increasing presence in value added products and its favourable financial profile.

• Crisil has reaffirmed the outstanding ratings of  ‘AAA/Stable’ and ‘ P1+’ assigned to Goodlass Nerolac Paints Limited (GNPL) Rs. 100 million non-convertible debenture programme and Rs. 300 million commercial paper programme, respectively. The re-affirmation follows the company's announcement to invest in a Malaysian joint venture, wherein Goodlass Nerolac will hold 55 per cent stake with the balance 45 per cent held by Kansai Paint Company Ltd (Kansai).

• In an another exercise, the agency has reaffirmed the 'AA+/Stable' rating assigned to non-convertible debenture issues of Mahindra and Mahindra Limited (M&M). Rating takes into account M&M's strong financial profile, its leadership in the Indian tractor industry, its strong market position in the Indian utility vehicles (UV), a growing presence in the export market and its high operating efficiencies that engender cost competitiveness

• The agency has reaffirmed its ‘ FAA+/Stable’ and ‘P1+’ ratings on Tractors and Farm Equipment Limited (TAFE) fixed deposit programme and its Rs. 150 million commercial paper programme. The ratings reflect TAFE's sustained market in fiscal 2005 despite intense competition in the domestic tractor industry The ratings has also factor in TAFE's acquisition1 of Eicher Motor Limited's (Eicher) tractors, engines, and the gears division at Parwanoo.

o       Meanwhile, the agency has reaffirmed the ‘A+’ rating assigned to Shanti Gears Limited (SGL) Rs. 17.5 million non-convertible debenture programme. The rating continues to reflect SGL’s established market position as the second largest player in the domestic non-automobile gear and gearbox segments, its wide product range and large customer base across diverse industries.

CORPORATE SECTOR

o       Auto major Mahindra & Mahindra is planning to double its exports of sports utility vehicles to 6000 units during 2005-06; it includes 5000 Scorpios and 1000 Boleros.

o       The Oil and Natural Gas Corporation (ONGC) has drawn up nearly Rs 4,000 crore investment plan for replacing its offshore vessels. Over 48 per cent of ONGC’s offshore support vessels and anchor handling tugs are more than 20 years old so needs replacement.

o       Marico India , through its wholly-owned subsidiary in Bangladesh , Marico Bangladesh has acquired a local toilet soap brand Aromatic from Aromatic Cosmetics Limited.

o       As part of Tata Tea Limited’s global expansion plan, it has recently announced acquisition of Good Earth, a speciality tea brand in the US , for nearly Rs 144 crore.

o       Sterling Biotech, the gelatin producer, has signed an agreement with the Gujarat based Torrent Gujarat Biotech to purchase its manufacturing unit at Masar in Vadodara for Rs 55 crore.

o       Reliance Industries Limited is planning to acquire 25 ships at an investment of over Rs 5000 crore. This includes chemical tankers, crude carriers, gas carriers and product tankers.

o       Associated Cement Companies has decided to sell 50 per cent in its subsidiary Everest Industries for about Rs 100 crore.

o       Tata Motors has launched the new Indica V2 Turbo with a price of Rs 4.10 lakh for the DLG variant and Rs 4.31 lakh for the DLX varient.

o       Aztec Software and Technologies has registered a healthy 134 per cent increase in the net profit to Rs 9 crore for the second quarter of 2005-06 against Rs 3.9 crore for the corresponding period previous year.

• Orchid Chemicals and Pharmaceuticals has recorded a net profit of Rs 27.2 crore in the second quarter of 2005-06, a rise of 587 per cent compared with the Rs 3.9 crore in the second quarter of 2004-05. Ceftriaxone injectable generic product launched in the US market has positively affected the company’s performance during the second quarter.

o       Indo Rama Synthetics has posted a 29.7 per cent increase in its net profit to        Rs 33.7 crore during July-September 2005-06 from Rs 25.9 crore during the same quarter previous year.

o       Information technology application outsourcing company Mastek has registered a 24 per cent increase in its net profit at Rs 15 crore on a consolidated basis in the first quarter ended September 2005. However, a standalone basis the company has posted relatively higher net profit of Rs 12.6 crore during the quarter ended September 2005 from Rs 10.6 crore for the corresponding period previous year, an increase of 19 per cent

• Tata Infotech has posted a 51.7 per cent rise in its net profit at Rs 27.8 crore for the second quarter ended September 2005 as against Rs 18.3 crore during the same period previous year.

• Crompton Greaves has announced a 30.5 per cent increase in the net profit to     Rs 32.5 crore during July-September 2005 from Rs 24.9 crore during July-September 2005.

• Mphasis BFL group has posted a net profit of Rs 40.2 crore, up by 27.4 per cent for the quarter ended September 2005. During the quarter the group has added 15 new clients; 12 from software services and 3 from BPO.

o       SKumar Nationwide limited, India ’s one of the leading textile company has declared its results for the quarter ended September 2005. Net sales of the company has stood at Rs 210.2 crore, a 20 per cent growth over Rs 175.6 crore for the same quarter previous year.

o       Usha Martins Limited, India’s one of the leading producer of speciality steel and wire-rope manufacturer has posted a net profit of Rs 14.9 crore for the quarter ended September 2005, an increase of 72 per cent over the previous year.

• Indiabulls financial service’s net profit has stood at Rs 19.2 crore for the second quarter of 2005, an increase of 465 per cent over the same period previous year.

• Maharashtra Scooters has reported a decline in its net profit and net sales for the quarter ended September 2005, net profit has gone down by 3.8 per cent to Rs 8.3 crore and net sales has declined by 22 per cent to Rs 4.6 crore.

LABOUR

o       The Union cabinet has approved a hike in dearness allowance to the central government employees by 4 per cent including a dearness relief to pensioners, which would be effective from July 1, 2006. Thus, a hike will increase a cash component of dearness allowance (DA) by 21 per cent of the basic pay. This additional benefit would be provided in the form of cash. This increase is over and above the existing rate of 17 per cent and is expected to cost the exchequer Rs. 2137.9 crore per annum. The financial burden of this increase would be Rs.1521.9 core per annum in case of dearness allowance and Rs. 616 crore per annum in case of dearness relief to pensioners.

o       On the basis of the recommendations of National Commission of Enterprises in the Unorganised and Informal Sector (NCEUS), the government has set a deadline of December 2005 to formalise a policy on employment growth in unorganised sector.  The Commission has been given a deadline by the government to formalise views on a policy on employment growth and improving productivity in urorganised sector. The terms of reference of the Commission include suggesting an employment strategy focusing on the informal sector, outlining the legal policy governing urorganised sector employment growth and reviewing the social security system for such workers.

o       The Pension Fund Regulatory Development Authority (PFRDA) is considering an alternative Central Record Keeping-agency (CRA) for a temporary period to meet the information gaps in the New Pension Scheme (NPS), before the operational architecture of NPS comes into play. It has also shown willingness to bear the costs of making this arrangement for now and assured that there would not be any additional burden on the states that have joined the scheme. Fifteen states have joined the NPS in the last two years. However, since the centre has not passed the PFRDA Bill, the actual operations of pension fund management haven’t started yet. Till the NPS architecture becomes fully functional, the Central Pension Accounting Office (CPAO) under the Controller General of Accounts is acting as the interim CRA. 

SOCIAL SECTOR

o       According to United Nations’ recently published ‘State of World Population 2005’ report, India exhibits a glaring fact that poverty, illiteracy and gender discrimination may not always move in tandem. All over the world, there has been a direct correlation between literacy and poverty levels with gender justice. However, despite high literacy and income levels in certain states like Punjab, Haryana, Himachal Pradesh and Gujarat in India , there is a continuing decline in a sex ratio in these states. The sex ratio in these states has declined from the 1991 figure of between 950-850 to less than 800 females to every 1000 males. India ’s national average of sex ratio too has declined from 945 females to every 1000 males in 1991 to 927 females to every 1000 males in 2001. According to the assistant representative of United Nations Population Fund, this underlines the fact that the literacy and increased level of income has only made access to technologies like pre-natal sex determination tests easier without any significant change in the attitude towards girl child.    

EXTERNAL SECTOR

• Gold jewellery exports could touch $5 billion in the current fiscal year as against $3.8 billion in 2004-05.

• An inter-ministerial committee has been set up to review all the existing reward schemes to exporters including Target Plus, Served from India and the Vishesh Krishi Upaj Yojana. The government is looking to put a stop to revenue leakage arising out of export promotion schemes.

• Auto major Mahindra & Mahindra is planning to double its exports of sports utility vehicles (SUVs) to 6000 in the current financial year that is 2005-06

INSURANCE

• In view of the growing competition among insurance companies in India, Max New York Life, one of the leading insurance companies, is planning to open 40 more branches in the B & C category cities of the country within a couple of years.

• ICICI Lombard General Insurance has become the first general insurance company to bag the ISO 9001:2000 certification from DET Norkse Veritas for establishing a quality management system with regards to settlement of motor claims.

INFORMATION TECHNOLOGY

o       Infosys Technologies has registered a growth of around 36 per cent in its net profit in the second quarter ending September 2005 at Rs.606 crore as against Rs.447 crore in the corresponding quarter the previous year. For the first half of the current financial year, the company’s revenues crossed the $1billion mark. Infosys and its subsidiaries added 8,026 employees in the second quarter, its highest ever intake in a single quarter, to take the total employee strength to 46,196.

o       Tata Consultancy Services (TCS) has announced a 20.7 per cent growth in its consolidated net profit to Rs.693.71 crore in the second quarter of the current fiscal year. During the quarter ended September 2005, TCS became India ’s first IT company with 50,000 employees on its rolls, adding 5,596 employees during the second quarter, taking the total headcount to 53,329 employees. Non-Indian nationals are 3.9 per cent of its total workforce. TCS has announced a second interim dividend of Rs.3 per share for its shareholders.

o       IT solutions provider Mphasis BFL has announced a 27.45 per cent rise in its consolidated net profit at Rs.40.16 crore for the quarter ended September 30, 2005 as against Rs.31.51 crore during the same period in the previous year.

*These statistics and the accompanying review are a product arising from the work undertaken under the joint ICICI research centre.org-EPWRF Data Base Project.

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