Current Economic Statistics and Review For the Week Ended September 15

A substantial segment of literature on the growth potential and achievements of the Indian economy, especially over the past decade, has tirelessly, albeit sporadically, focused attention on infrastructure investment as a vital requirement for sustained acceleration in the economy’s growth. In the light of the much advocated and eagerly awaited initiatives now being undertaken by the government in the direction of infrastructure financing, this note attempts to trace the genesis of the ideas and the accompanying debates that have finally culminated in the current policies and programmes. We map out certain contributions of past literature and trace observations in five-year plan documents, which seem to have shaped the recent policy proposals and their implementation, and finally critique the current plans and programmes based on ideas and arguments appearing in articulated expert opinions.

Since the beginning of the 1990s, inherently contractionary public policies had resulted in a massive squeeze on investment in physical infrastructure in particular, and a sharp contraction in the proportion of development expenditure in the government’s total expenditure. There were gaping shortfalls in the provision of infrastructure facilities – specifically, rail and road transport, power and irrigation. Against this backdrop, by the early 2000, that is, after a decade of economic reforms, the stark reality of a manufacturing crisis had began to loom large on the economic horizon and the intellectual opinion was unanimous on the critical need for increased investment in infrastructure and this was forcefully brought into the forefront of economic thinking. Creative ideas regarding a sustainable revival of the economy by deploying the surfeit of liquidity in the financial system in a supply-leading strategy for development of physical infrastructure began to emerge. The areas of railways, power sector, irrigation programmes, ports, and road development all with pent-up demand and having the potential for spreading beneficial effects in the form of immeasurably high forward and backward linkages, were strongly recommended for accelerated investment and capacity building.

In the above scheme of ideas, a fresh new perspective of infrastructure sector funding that was presented concisely, yet simplistically, in a dynamic proposal for promoting innovative use of excess liquidity in the financial system, was the one which was contained in an article in the Economic and Political Weekly (S.L.Shetty 2001). The thrust of this proposal was advanced thus:

“The proposition advanced here is that the present situation calls for a decisive expansionary public policy, but this cannot be attained with the help of the government’s budgetary programmes at the central or state or their combined levels. A decisive thrust in development programmes has become beyond the scope of their fiscal health. Therefore, the best answer to the present development requirements has to be found outside the budgetary programmes. Taking into account the current and prospective size and nature of sources and uses of funds in the financial system including external flows, it is our considered judgment that it would be feasible to line up the required investible resources for such an investment thrust. The implied proposition again is that in the matrices of resource availability and the economy’s absorptive capacity, it is possible – and also advisable with the objective of a more efficient use of available resources – to superimpose on the already planned deployment of resources, an additional investment expenditure of Rs 15,000-16,000 crore per annum or Rs 75,000-80,000 crore for the next five-year period, distributed over the five key infrastructure areas identified above.” (S.L.Shetty 2001, p 2826)

The article outlines a detailed scheme for allocating a specified amount for expanded programmes for railways, irrigation projects, power sector development and road transport. This proved to be a culmination of loose strings of economic thought on the Indian economy of that period – revival of overall economic growth, need for increased investment in infrastructure, foundations of increased industrial development and importance of investment demand. Most importantly, it introduced among the academic and policy debate circles an innovative scheme focused on funding of much-needed high- cost, long-term infrastructure projects.

The continued discussions and debates finally made their mark and the glaring need to augment infrastructure finance was acknowledged by the then Union Finance Minister, Yashwant Sinha, in his budget speech for 2002-03. The basic flavour of the argument presented earlier for the use of vast resources in the economy’s financial system was lost in the bargain; what remained was a policy proposal for the creation of a meagre fund for infrastructure financing in the budget for 2002-03. Certain guidelines for setting up of the fund and broad contours of its deployment were set out in the budget in the following words:

“…the following measures to facilitate faster private investment in infrastructure facilities:

1. An Infrastructure Equity Fund of Rs 1000 crore will be set up to help in providing equity investment for infrastructure projects. Contributions to the Fund to be managed by the Infrastructure Development Finance Company Limited (IDFC) would initially be made by public sector insurance companies, financial institutions and some banks.

2. An institutional mechanism is being set up to coordinate the debt financing by financial institutions and banks of infrastructure projects larger than Rs 250 crore. IDFC will act as the coordinating institution with primary responsibility for different sectors being shared with the IDBI and ICICI.

3. Public-private partnerships[1] (PPP) will be encouraged for the provision of infrastructure facilities, the modalities for which are being worked out by a Task Force.”[2]

Pursing this declaration, Dr Jaswant Singh in the Budget of 2003-04 made budgetary allocations totaling Rs 60,000 crore on ambitious infrastructure development projects like the National Highway Development Programme (NHDP), the National Rail Vikas Yogana (NRVY) and programmes for modernisation and renovation of seaports and airports. However, despite the initial euphoria, progress of these projects has been painfully slow with poor planning, mismanaged budgeting and implementation delays. Moreover, investment planning for infrastructure has always been and continues to be, awarded less than its due attention from policy makers. It was around the late 2004 that renewed interest on the issue was sparked off by Dr Montek Singh Ahluwalia’s controversial ideas on the use of foreign exchange for infrastructure financing.

The initial conceptualization in economic literature for the use of additional liquidity in the financial system, inclusive of forex reserves, for financing infrastructure development, attained a new meaning in policy discussions around late 2004, credit to Dr Montek Singh Ahluwalia, the then newly-appointed Deputy Chairman of the Planning Commission. Given the country’s huge forex reserves in that period, to the tune of $ 120 billion plus, the planning body chief floated a scheme to utilise the resource for financing India ’s infrastructure investment demand, then estimated at a whopping $ 150 billion. Dr Ahluwalia rigorously promoted his choice proposal of a rather simplistic (albeit arguably improbable) model linking the use of foreign exchange reserves to infrastructure. The essence of the Planning Commission’s proposed model could be summarised thus:

§ government increases the fiscal deficit beyond the pre-specified amount by issuing securities say by approximately Rs 23,000 crore ($5 billion) per year for the succeeding two or three years.

§ RBI fully monetises this additional fiscal deficit by directly purchasing these securities, thereby avoiding potential crowding-out of private investment.

§ government purchases an equivalent amount of foreign exchange to finance infrastructure projects.

§ RBI releases an equal amount of forex into the system to offset the injection of additional money supply to effectively prohibit any exchange rate fluctuations.

§ government sets up an infrastructure project employing the acquired foreign exchange, given 100 per cent import of infrastructure projects; alternatively, in case of non-feasibility of 100 per cent importable infrastructure, increasing imports of tradable commodities by reduction in their domestic prices, preferably through custom duty cuts, suggests Dr Ahluwalia.

Predictably, a torrent of fiery debate followed the declaration of this scheme. The finance ministry remained cautiously silent on the issue, while the Reserve Bank voiced a justifiably qualified refusal to accept the proposal. If there are duly-approved bankable projects, bank finance and foreign exchange would not pose any constraints. The RBI shall jolly well release the required foreign exchange.

The issue in infrastructure development has not been one of finance or foreign exchange; it has essentially been one of the organisational and institutional issue. Certain other key criticisms of the Planning Commission proposal, as summed up by Shankar Acharya (October 2004) are as follows:

§ adverse impact due to the inherently less import dependent nature of most infrastructure projects.

§ custom duty cuts and resultant swell in fiscal deficit for non-importable projects.

§ rise in public debt owing to increased fiscal deficit; specifically a higher debt-GDP ratio and heavier debt service burden.

§ tampering with fiscal deficit targets as set by the Fiscal Responsibility and Budget Management Act (FRBM).

§ linking macro variables of public debt, interest and liquidity management policies of the RBI with specific micro components of government expenditure under the pretext of a special case for infrastructure financing.

Another set of strong adverse comments on the fiscal implications of the proposal came from Govinda Rao (November 2004):

· in the short and medium term the policy would lead to an increase in the fiscal deficit if the reserves are spent on domestic goods and services rather than on imports.

· the policy cannot be a substitute for fiscal correction as it would provide ample scope for postponing the fiscal reforms indefinitely

· since a significant portion of income generated in the unorganised sector is not captured in the official GDP estimates, the fiscal deficit ratio are overestimates and the actual ratio would be lower.

· spending on import-intensive investment in infrastructure by augmenting money supply and increased demand for domestic goods and services may add to inflationary expectation

The above sequences of ideas on public policies have lately culminated in a model for infrastructure financing in the shape of financial Special Purpose Vehicles (SPVs) as introduced in the latest Budget (2005-06). After a disheartening comment that “the most glaring deficit in India is the infrastructure deficit”, the present Finance Minister, P Chidambaram, has pursued the issue by an announcement stating:

“…there are many infrastructure projects that are financially viable but, in the current situation, face difficulties in raising resources. I propose that such projects may be funded through a financial Special Purpose Vehicle (SPV). When large infrastructure projects are implemented, the foreign exchange resources could be drawn for financing necessary imports. Accordingly, I propose to establish an SPV to finance infrastructure projects in specified sectors. Roads, ports, airports and tourism would be sectors that can benefit most from the SPV.” (Budget Speech 2005-06)

Further, the government would fix the borrowing limit to the SPV at the beginning of each fiscal year and for 2005-06 the limit has been fixed at Rs.10,000 crore. A provision of Rs 1,500 crore was also made for a mechanism of viability gap funding for infrastructure projects, which was to be used in conjunction with the funding mechanism through the SPV.

Some very frenzied debate regarding the finer details of the SPV ensued between the Finance Ministry and the Planning Commission after the announcement. The main points of contention were the appointment of official directors on the board of the SPV, the kind of companies it should lend to and whether refinancing of current projects should be allowed. While the Planning Commission has favoured official directors being appointed on the board of the SPV, the Finance Ministry wants the board members to be appointed only on the basis of their professional competence. The commission opposed the idea of allowing the SPV to refinance existing projects, while the ministry was in approval of it. The plan body lobbied for the cause of the SPV to fund only public-private partnerships as opposed to the Finance Ministry’s view of providing money to private sector companies as well. Lastly, the Planning Commission preferred all borrowings to be guaranteed by the union government, whereas the finance ministry was not inclined to make this provision mandatory.

After due consideration of all these differences and after attempting to sort them out, it is only as recently as in October 2005 that the Prime Minister’s panel has cleared the proposal for setting up of the infrastructure SPV. The subsequent section explains the concept of an infrastructure SPV and highlights key guidelines for structuring the SPV as have been approved for implementation and are expected to be realised before the end of December 2005.

Box: The SPV Mechanism

A special purpose vehicle (SPV) exemplifies a financial contract in the nature of a firm. It is a tool for financial engineering, a mere mechanism to achieve sound contracting. It is a legal firm whose every action is defined by pre-specified contracts. Conventionally, SPVs are purely financed by debt capital since traditional notions of equity capital or capital adequacy are irrelevant to SPVs given that they are not ‘normal’ companies but mere placeholders for contracts. For taxation purposes, an SPV uses the structure of either a trust or a mutual fund. Typically, a trustee discharges the functions of receipt and expenditure of cash as per the pre-specified contracts. There are no employees nor any management team in place to make autonomous decisions once the SPV is in motion. The technical vision of the concept and the economic rationale underlying it is beautifully brought out in a well-crafted example:

“…consider a bridge being built by the Indian Railways. One possibility is for the Indian Railways to issue bonds in order to finance the bridge, and augment the general revenues of Indian Railways by charging the traffic. However, the bondholder would then be exposed to the complexities of the balance sheet of the Indian Railways. An alternative contracting mechanism would be to set up an SPV for this bridge alone. The SPV would issue bonds, which are only focused on the bridge, and would have cash flows, which only derive from the user charges for the bridge. This allows the bond investor to purely focus on the clearly identified cash flows of the bridge, and make decisions about investment without complexities introduced by the broader financial position of the Indian Railways. At a legal level, it is essential that the SPV is ‘bankruptcy remote’ from the main Indian Railways in the sense that financial distress of either would not affect the other.” (Economic Survey 2002-03)

At long last, by early October 2005 the Prime Minister’s Task Force on Infrastructure has finalised guidelines for setting-up an infrastructure SPV proposed in the Budget of 2005-06. The SPV, christened India Infrastructure Finance Company Limited (IIFCL), is expected to begin funding of projects by end December 2005, focusing on six infrastructure areas – roads, airports and ports, national highways, railways, power and urban renewal. Some details regarding the functioning of the SPV thus finalised are:

§ There is to be no lending limit for individual projects. Only the overall borrowing limit for IIFCL will be fixed on a yearly basis as per requirements of the economy. The borrowing limit for the current fiscal, 2005-06, has been fixed at Rs 10,000 crore.

§ IIFCL is to have an initial paid-up capital of Rs 10 crore and the authorised capital has been fixed at Rs 1,000 crore.

§ IIFCL is to be open-ended so as to include all private and foreign banks instead of confining financial assistance to the six lending agencies that are a part of the inter-institutional group (IIG).[3]

§ The borrowings of IIFCL are to be guaranteed by the government but there is to be no counter guarantee for the projects funded by IIFCL.

§ The finance ministry has agreed to reduce the guarantee fee for IIFCL’s borrowings from the usual 1 per cent to 0.25 per cent so as to reduce the cost of funds.

§ The projects involving public-private partnerships (PPP) are to be awarded greater priority for funding by IIFCL as against stand-alone private projects.[4]

§ IIFCL is to provide funds to fresh ventures as well as re-finance existing projects.

In retrospect, tracing the evolution of literature and policy developments reveals severe alterations in the core innovation, which envisioned the use of surfeit of liquidity in the financial system for infrastructure financing. The idea has been severely mutilated over successive budgetary spans, eventually shaping the special infrastructure SPV. Yet, IIFCL raises more questions than provides answers for infrastructure development in the country. The potentiality of private participation still remains underexplored; the verification of financial viability of projects is yet unclear; and the need to overhaul the regulatory framework has been consistently neglected. The promise of high returns on infrastructure investments depends largely on concept building for infrastructure schemes, judicious execution of tasks and timely commissioning of projects – areas that seem to have been entirely overlooked.

§ Acharya Shankar (2004); "Forex For Infrastructure, Anyone?" Business Standard, October 29, 2004.

§ Rao, Govinda M. (2004): ‘ Forex and Infrastructure” The Business Standard, November 16, 2004.

§ Shetty S L (July 2001); "Reviving the Economy: Some Explorations", EPW, Volume XXXVI, No 30.

[1] In the budget for 2003-04, this point has been stressed thus, “In developing infrastructure, there is need to encourage public-private partnership, so that public funds are leveraged, and the quality of service delivery improved, thus yielding better value for money.” Yet, the issue remains a major point of contention till date.

[2] Budget Speech for 2002-03

[3] The setting up of an Inter-Institutional Group (IIG) for financing of infrastructure projects was announced in the Budget of 2004-05, as per which the IIG comprising IDBI, IDFC, ICICI Bank, SBI, LIC, BoB and PNB was to “ pool resources on a callable basis…(to) ensure speedy conclusion of loan agreements and implementation of infrastructure projects.”

[4] This is in the light of two decisions recently taken by the government: (1) to encourage public-private partnership projects for infrastructure development and (2) to no longer provide budgetary support to infrastructure projects but to merely fund the viability gap. Viability gap funding is the scheme whereby the government directly gives grants to promoters of projects that are unviable under the existing user charge regime. It has been decided that the total viability gap funding is not to exceed 20 per cent of the total cost of the project.

Although there has not been a shortfall in the area coverage and production of onions, the market arrival has been delayed due to heavy rains, which are fueling the prices of onions. While the wholesale prices of onions are hovering around Rs 10-15 per kg, the retail prices are as high as Rs 18- Rs 25 per kg. Usually at this time of the year, onions cost about Rs 14-16 a kg in retail and Rs 6-8 a kg in the wholesale. Apart from activities like hoarding of onions, the high levels of humidity have spoilt the stored onions thereby reducing their availability in the market.

The sales of major fertilisers like Urea, DAP and MOP have increased by around 10, 6, 5 percent, respectively during the kharif season 2005.

The demand during this kharif season has remained high because of increase in sowings of various crops like rice, cotton, sugarcane, sunflower and castor seed etc. According to The Fertiliser Association of India (FAI), however, there might be slight variation in the consumption of fertiliser due to stock with farmers. As per FAI records the total production of fertilizer in 2004-05 has stood at 206 lakh tonnes. In 2005-06, while the production of Urea has increased, DAP production has gone down. On the other had MOP has been imported from Canada , Germany , Middle East and CIS countries.

The export of sesame seeds has augmented by almost 36 per cent to 44,379 million tonne during the off-season of April – July 2005 from 32, 684 million tonne during same period last year. The exports are projected to increase at least 20 per cent and will continue till March 2006. Indian sesame seeds have high demand in countries like South Korea , Japan , Turkey , Syria , Netherlands , The UK and Singapore . This surge in the exports has resulted from failure of China , major competitor to India , to provide good quality sesame seeds following the non-seasonal rains that spoilt the crop and fall in production of the same.

Soyabean oil imports have displayed a significant spurt of above 100 per cent from last year with the imports expanding to 18.2 lakh tonnes (lt) during the first 11 months of the current oil year from November 2004 to September 2005 compared with 7.2 lt during same period last year. This phenomenal increase in imports has attributed to lower custom duty on Soya oil, high profitability in the domestic business of Soya oil and expansion of oil refining capacity in the country.

During the farm negotiations at the WTO general council meeting in Geneva , India and other developing countries have denied to lower their agricultural tariffs to more than two-thirds the extent of tariff reduction offered by developed countries. The US and the EU have interlinked various issues, for example, market access in agriculture with other segments like services and non-agriculture market access (NAMA), which have hindered the Five Interested Parties (The US, The EU, India, Australia and Brazil) to arrive at unanimous solution. EU’s inability to gain backing of its members for reducing in agri subsidies also contributed to the deadlock.

Chemicals

Speciality petrochemicals manufacturer, Panama Petrochemicals Limited (PPL), is implementing a Rs 30 crore, capital expenditure programme involving expansion of its capacities at Ankleshwar and Daman to meet increasing demand from the pharmaceuticals and cosmetics industries.

INFRASTRUCTURE

The government has decided to make the functioning of India Infrastructure Finance Company Limited (IIFCL), the Rs 10000 crore SPV for core sector financing, more open ended to include all private and foreign banks instead of confining assistance to the six lending agencies – IDFC, SBI, LIC, IDBI Ltd, PNB and BOB – that are apart of the inter-institutional group (IIG). The finance ministry has also agreed to reduce the guarantee fee for IIFCL’s borrowings from the usual 1 per cent to 0.25 per cent so as to reduce the cost of funds and also to grant the SPV flexibility in choosing a mix of borrowings.

Petroleum and Petroleum Products

The government has constituted a six-member committee to study various aspects relating to pricing and taxation of petroleum products, under the chairmanship of Dr Rangarajan. The committee is to submit its report within six months, outlining a new transparent mechanism for autonomous adjustments of petroleum product prices by oil marketing companies and suggest measures on stabilising prices in view of the financial position of oil companies.

The petroleum ministry has suggested that to make up for under-recoveries of oil companies oil bonds be issued to them in proportion to the losses that they have incurred in selling petroleum products below the import parity price. The ministry officials are in favour of issuing zero coupon bonds of three to five years duration carrying an interest rate of 7 per cent. The bonds worth Rs 12000 crore are likely to be issued in phases.

Shell India and ONGC are planning to set up a high-grade bitumen refinery at Mangalore, Karnataka with an eye on the domestic market - the country’s bitumen requirement having increased following large-scale construction activities like the government’s highway project. Shell, one of the world’s leading bitumen suppliers, may take an equity in the project and also bring in technology; while ONGC may float a separate company to execute the project.

Coal

Planning commission deputy chairman, Montek Singh Ahluwalia, has criticised the pricing and linkage mechanism in the coal sector. He has made a case for linking domestic coal prices with international prices and favours zero custom duty regimes on imports of energy sources like coal and crude in order to encourage imports. Coal secretary has also supported the proposal that the coal sector should be opened to private sector without restrictions on captive mining.

Roads

The national highway authority of India (NHAI) has signed concession agreements totalling around Rs 22000 crore in the last six months, the highest ever in the first half of any fiscal year. All of them are build-operate-transfer contracts under public-private participation, pertaining to four-laning of national highways under phase III A of national highway development programme. To NHAI’s advantage a sizable number of the contracts awarded are on negative grants, demonstrating the enhanced confidence of the private sector in this model. Also, better technology and lower cost of financing have aided the spurt in activity. The interest rates which hovered around 18-20 per cent six years back, have now come done to 10 per cent.

At a CII session, the director general of international air transport association (IATA), has commented the expansion rate of the Indian aviation sector to be the fastest in the world and outlines five priority areas for the improvement in the sector’s functioning and competitiveness, viz., operational safety, cost effectiveness, freedom to do business, implementation of technology and up gradation of infrastructure.

INFLATION

The annual point-to-point inflation rate based on wholesale price index has gone up to 4.62 per cent during the week ended October 8, 2005 from 4.24 per cent registered during the previous week. The inflation rate was at 7.10 per cent in the corresponding week last year.

The WPI in the week under review has risen by 0.2 per cent to 197.2 from the previous week’s level of 196.9 (Base: 1993-94=100). The index of primary articles’ group has increased by 0.2 per cent to 195 from the previous week’s level of 194.6, due to an increase in the price indices of food articles by 0.3 per cent to 197.7 from 197.1. The higher prices of food articles have been evident due to the higher prices of fish-marine, condiments and spices, jowar, arhar and eggs. The index of ‘fuel, power, light and lubricants’ group has remained unchanged at the previous week’s level of 315. The heavy-weighted manufactured products’ group constituting 63.7 per cent of total weight, has risen by 0.2 per cent to 171.6 from 171.3 of the previous week’s level, primarily due to increase in the prices of food products, textiles, ‘chemicals and chemicals products’, ‘non-metallic mineral products’ and ‘machinery and machine tools’.

The latest final index of WPI for the week ended August 13, 2005 has been revised upwards; as a result both, the absolute index and the implied inflation rate moved up to 195.1 and 3.67 per cent instead of the provisional levels of 194.1 and 3.13 per cent, respectively.

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 firming up due to the reducing impact of high base effect coupled with rising prices of food articles. 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.

The RBI has asked the banks to provide the required details to the customers in their passbook/accounts statement regarding the credit transactions through electronic clearing service (ECS). The central bank has expressed concern about the rise in the number of customers’ complaints on the use of ECS. The main complain is that details provided by the banks in passbook/statement of accounts for the ECS entries, are not complete and in the absence of details, reconciliation of transactions by the customers becomes very difficult. ECS is increasingly being used by various users like government departments and corporate bodies for repetitive payments like salary, pension, dividends and interest payments. While ECS has proved to be of great convenience to both, the users and the beneficiary customers.

Propelled by robust fee income, HDFC Bank posted a 31.1 per cent rise in net profit to Rs.199.6 crore for the second quarter ended September 2005, as against Rs.152.2 crore in the corresponding quarter the previous year. The other income increased by around 122 per cent to Rs.260.2 crore as against Rs.122.7 crore in 2004. The rise in the other income was backed by doubling of revenues from foreign exchange/derivatives transactions to Rs.28.4 crore as against Rs.4.2 crore and also due to rise in fees and commissions to Rs.217.8 crore as against Rs. 133.9 crore.

The finance ministry is to begin the Budget exercise next month. Reduction of fiscal deficit is one of the constraint that the ministry has to look in to. Finance minister (FM) has assured that he will not inject more taxes to push growth in the economy and the tax rates will be kept moderate and reasonable. FM is considering an agenda of reforms in the financial sector. Bills with regard to opening of the pension sector and those on banking reforms are expected to be passed during the winter session.

Advance tax collections, the total of June and September instalments increased by 28 per cent at Rs 33,700 crore. Up to September there has been 90 per cent increase from steel sector and 40 per cent from telecom sector in advance tax collections, while that from the services sector remained same. The reason for growth in tax payment from the steel sector has been partly sighted as a rise in commodity prices, though intrinsically lower depreciation seems to be the reason behind the increase. In the budget 2005-06, government reduced the depreciation on plant and machinery from 25 per cent to 15 per cent. As a result net profit figure of the concerned companies showed a rise while their gross income and expenditure reflected to be at the same level. Thus, despite the cut in corporation tax for domestic companies, capital intensive companies’ tax burden increased because lower depreciation has been considered in tax payments’ estimation.

The Income Tax (I-T) twenty-first amendment rules, 2005, requires specific categories of persons to annually file annual information returns (AIR) by August 31 every year. These specific categories have to report third party transactions of the prescribed minimum value by the I-T department each year. The relevant categories include banks, mutual funds, companies, besides registrars of immovable property. The AIR has to be filed in a prescribed form through National Securities Depositories. This is the first year of filing such deals. The purpose behind AIR is that the finance minister intends tracing tax evaders.

Banks to report cash deposits up to Rs 10 lakh or more a year in the savings account of an individual.

Credit card issuers to report in excess of Rs 2 lakh payments from a card holder in a year.

Companies to report investments of Rs 5 lakh or more in bonds or debentures by a person and investment of Rs 1 lakh or more by a person in public or rights issues of shares of companies.

A small number of registrars and sub-registrars of immovable property have reported transactions valued at Rs 30 lakh or more to (I-T) department so far. They have been the weakest link in the finance ministry’s plan to track tax evaders.

The income tax department (I-T) claimed Rs 287 crore from Coca-Cola as outstanding tax dues. I-T department had attached the bank accounts of the company at Delhi , Mumbai and Pune. In response, the company referred the case to the Bombay high court so as to receive a stay on the government’s action of recovering the due. The company now has to pay Rs 10 crore in three instalments having got reprieve from Bombay high court which has ordered a stay on the attachment of the company’s bank accounts by the I-T department.

In the first half of the current financial year, though the number of IPOs have been higher than that in the corresponding period last year by 175 per cent more, the amount raised in this fiscal is less than that in the last year. Also, the number of small issues tapping the market has increased sharply as reflected by the fall in the average size of public issues from Rs 775 crore in January – March 2005 to Rs 317 crore and Rs 396 crore, in April –June and July – September quarters, respectively.

Prithivi Information Solutions Limited is offering 50 lakh shares of RS 10 each through 100 per cent book building process in a price band of Rs 250-270 per share.

PBA Infrastructure Ltd is tapping the market between October 24 and 28 through a public offer of 50 lakh shares of Rs 10 each at a premium of Rs 50. The issue price is thus fixed at Rs 60 per share.

Despite a recovery in the stock indices on Friday, October 21, over the week, the stock indices have registered losses. The BSE sensex fell by 1.62 per cent to close the week at 8067 and NSE nifty by 1.64 per cent to end the week at 2444 points. The BSE sensex has fallen by about 11 per cent from its high on October 5 of 8821 points in intra-day trades. The fall in indices has been triggered mainly by the weakness in global markets on fears of a hike in US fed rate and huge selling by FIIs.

Performance of sectoral indices has been in sync with the general market trend. Among the sectoral indices of BSE, health care, consumer durables indices have recorded larger losses as compared to others.

Between October 1 and 20, FIIs have net sellers of equities to the extent of Rs 1,462 crore, while mutual funds have been net buyers of Rs 1,400 crore. In the previous three months, investments by domestic institutions have risen consistently irrespective of the fall in indices, which could be considered as a sign of development of the equity markets.

BSE and NSE have asked Refco-Sify to stop taking fresh positions in both the cash and derivatives market from October 17, in view of the problems faced by its parent company in US.

Mutual funds that manage liquid and money market schemes have decided not to accept subscriptions or redemption requests during weekends following the RBI’s decision to follow 5-day week.

The high level of volatility in the cash market led to liquidation of positions amid margin calls in a number of stocks. Given the approaching expiry of contracts, there has been huge activity in the market. The FIIs have been among the major players who were churning their positions in futures and options.

The cut-off yield on treasury bills hardened further in anticipation of a hike in the short-term rates; the 91-day treasury bill yield has risen from 5.49 per cent to 5.53 per cent. Similarly, the yield on 182-day bill has risen from 5.65 per cent to 5.78 per cent.

The market sentiments remained cautious ahead of the impending credit policy, depreciating rupee and FII outflows. However, as the Finance Minister reiterating the strength of the rupee and moderate inflation, increasing mainly because of higher oil prices boosted the prices of the government securities across maturities. But as the inflation turned out to be higher, the sentiments again turned cautious. The weighted average YTM of 8.07 per cent 2017 has increased marginally from 7.24 per cent on October 14 to 7.30 per cent on October 21. Nevertheless, liquidity remained ample in the system as the daily average outstanding amount in reverse repo under LAF increased to around Rs 15,711 crore from Rs 11,324 crore in the previous week.

It is expected that the expert committee on corporate bond and securitisation set up by the government under the chairmanship of Dr R H Patil would suggest allowing short selling in corporate bond market and CCIL would start handling settlement of corporate debt papers.

The rupee-dollar exchange rate witnessed substantial depreciation in the rupee accompanied by FII outflows from the capital markets; the rate touched a low Rs 45.41 against dollar before gaining on suspect RBI intervention.

The six-month forward premia edged up to 0.50 per cent on October 21 from 0.47 per cent on October 14.

As rupee dollar had been depreciating against the rupee for the past few years, corporates have created liabilities in dollar because borrowing in a currency which is depreciating against the local currency, will cause less outflow for the company. But now, the dollar is firming up, which is likely to affect their outflows. But, most corporates view these movements as temporary.

The Union Agicultural Minister, Mr Sharad Pawar, inaugurated the “Commodity Suchana Kendra” – an initiative of Multi Commodity Exchange, the Maharahstra State Agricultural Marketing Board (MSAMB) and National Spot Exchnage for Agricultural Produce (NSEAP) at the Agriculture Produce Market Committee (APMC), Pune. The Kendra will furnish national spot and futures commodity prices alongside the commodity index of MCX. This is expected to help price discovery process through dissemination of data.

In wake of the collapse of Refco Inc in US, the FMC is gearing to track the member of commodity markets and particularly of Refco, which operates in India in a joint venture with Sify and is a member on both MCX and NCDEX.

Crisil has reaffirmed the ‘P1+’ rating assigned to Revathi Equipment Limited (REL) Rs. 50 million short-term debt programme. The rating continues to reflect REL’s healthy market position in the open-cast mining segment, its steady growth prospects in the coal-mining segment and stability in margins provided by high levels of outsourcing of non-critical processes and equipment.

Icra has assigned a ‘ LA- ‘ rating to the Rs. 200 million long-term debt programme of Kandhari Beverages Limited (KBL). The rating reflects KBL’s established position as one of the leading bottler for Coca-Cola; India (CCI), the financial and marketing support from CCI, and its steady operating and financial performance.

Crisil has reaffirmed the ‘BBB (SO)/Stable’ rating assigned to Gujarat Urja Vikas Nigam Limited (GUVNL) Rs. 6.5 billion non-convertible bonds as well as to its Rs. 4 billion and Rs. 5 billion non-convertible bonds issues. The ratings on these bond issues continue to reflect Gujarat government’s moderate financial position, reflected in high debt and deficit levels, high revenue expenditure due to large power sector subsidies, and a sub-optimal exploitation of tax potential. The ratings are also supported by the state's favourable economic and social structure, its position as a preferred investment destination, and good management of debt and guarantees.

Crisil has withdrawn the ‘BBB (SO)/Stable’ rating assigned to Sardar Sarovar Narmada Nigam Limited (SSNNL) Rs. 3.02 billion and Rs. 2.70 billion non-convertible bonds issues. The agency has also withdrawn the ‘BBB (SO)/Stable’ rating assigned to SSNNL’s deep discount bond aggregating to Rs. 2.77 billion.

Crisil has upgraded the rating assigned to Maharashtra Krishna Valley Development Corporation’s (MKVDC) Rs. 21340 million bond programme to ‘BBB- (SO)/Stable from ‘D (SO)’. The rating upgrade is primarily driven by the fact that, over the last year, Maharashtra government has serviced all debt obligations on the state-guaranteed borrowings in time. It also reflects Maharashtra government’s improved guarantee management, resolve to avoid any default on its guaranteed borrowings and a proactive fiscal reform agenda to improve the state's financial risk profile.

Crisil has reaffirmed the ‘ A+(SO)’ rating assigned to Tamil Nadu Electricity Board (TNEB) Rs. 6.15 billion bond programme. The agency has also reaffirmed the ‘A+ (SO)’ rating assigned to Tamil Nadu Industrial Development Corporation (TIDCO) Rs. 3.89 billion bond programme. Both the rating reaffirmations take into consideration Tamil Nadu government’s comfortable financial risk profile as well as the state’s superior social and economic infrastructure and sound guarantee management policy.

The ‘A (SO)’ rating assigned to bond programmes of the following three government of Andhra Pradesh-owned entities, viz., Andhra Pradesh Power Generation Corporation Limited (APGenco), Andhra Pradesh Power Finance Corporation (APPFC) and Transmission Corporation of Andhra Pradesh Limited (APTransco) has been reaffirmed by Crisil. The ratings on the bonds continue to be based on an unconditional and irrevocable guarantee from the Andhra Pradesh government. The ratings also reflect the state’s stable financial risk profile and the initiatives taken by the state government to further develop good economic management system.

Icra has assigned a rating of ‘mfAAA’ to Birla Sunlife Mutual Fund’s Floating Rate Long-Term Plan. The rating indicates highest credit quality rating assigned by ICRA to debt funds. The rated debt fund carries the lowest credit risk, similar to that associated with long term debt obligations rated in the highest credit quality category. The ratings should, however, not be construed as an indication of the prospective performance of the Mutual Fund scheme or of volatility in its returns.

Fitch Ratings has assigned ‘F1+ ( Ind ) rating to Citibank India ’s certificate of deposits programme worth Rs. 10 billion. The rating takes into consideration the financial strength of the international bank (rated AA+/Stable, well above the Indian sovereign rating of BB+/Stable) as well as the strong financials and healthy liquidity of its Indian branch.

The world’s largest maker/producer of networking equipment, Cisco System, has announced an investment of $ 1.1 billion in India over the next three years. The investment will be made in the areas of research and development, e-governance and expansion in manufacturing, finance and telecom sectors.

Maruti Udyog and Suzuki Motor Corporation will invest Rs 2,115 crore in India to produce 10 lakh cars a year by 2010.

Anil Ambani controlled, Reliance Capital, has acquired the Chennai-based AMP Sanmar Life Insurance for Rs 97 crore.

Gujarat Glass Limited, a part of Piramal Enterprises, has acquired the cosmetics and perfume business of US based the Glass Group, for $ 18 million.

Bajaj Auto, the country’s one of the largest motorcycle producer/manufacturer has planned to expand its presence in South-East Asia and Africa to tap the growing demand for two-wheelers and motorised rickshaws. The company has reported a net profit of Rs 290.8 crore in the quarter ended September 2005-06, a 61 per cent growth, over the same quarter previous year.

Pidilite Industries Limited has posted a net profit of Rs 26 crore during July-September 2005-06 against Rs 18 crore during July-September 2004-05 –an increase of 44 per cent.

Hexaware Technologies net profit has galloped by 235 per cent to Rs 22.1 crore for the third quarter ended 2005-06.

Bharat Forge Limited’s (BFLs) net profit has increased by 37 per cent to Rs 51.8 crore as well consolidated net profits have gone up by 31 for the quarter ended September 2005.

Eveready industries India ’s net profit has surged by 371 per cent to Rs 22.5 crore during July-September 2005-06 against Rs 4.7 crore during the same period previous year. For the half year ended 2005-06, the company has recorded net profit of Rs 28.8 crore compared with Rs 34.1 lakh for April-September 2004-05.

Hero Honda Motors Limited’s net profit has risen by 23.6 per cent to Rs 237.9 crore in the second quarter (Q2) 2005-06. The company has sold 7.42 lakh motorcycles in the second quarter, up 21 per cent over 6.13 lakh units in Q2 2004-05.

Varun Shipping has reported a whooping 105 per cent rise in net profit to Rs 43.4 crore for Q2 2005-06.

Reliance Energy Limited, a Dhirubhai Ambani Enterprise has reported a 24.5 per cent rise in the net profit at Rs 159.6 crore for the quarter ended September 2005-06. For the half year ended, the company’s net profit has enhanced by 37 per cent to Rs 316 crore.

Cummins India Limited has registered 20 per cent rise in the net sales to Rs 357 crore for the quarter ended September 2005-06 similarly, its net profit has surged by 36 per cent to Rs 39.6 crore despite an expenditure of Rs 4.5 crore towards VRS.

Ashok Leyland net profit has augmented by 74 per cent to Rs 75 crore during July-September 2005-06 against Rs 43 crore during July-September 2004-05.

Tata Power Company’s net profit has dipped by 11.4 per cent to Rs 125.7 crore for Q2 2005-06 compared to Rs 141.9 crore during the corresponding period previous year despite a rise in sales volume by 10 per cent (3341 million units). The company’s cost of fuel and the cost of power purchase have risen by 18 per cent to Rs 510.5 crore and by 30 per cent to Rs 133.6 crore, respectively.

JSW Steel has reported a 20 per cent decline in the net profit to Rs 106.3 crore for July-September 2005-06 as compared to Rs132.8 crore for July-September 2004-05.

State-owned Neyveli Lignite Corporation Limited has reported a 15.3 per cent decline in the net profit to Rs 237 crore during July-September 2005-06 likewise, total income has decreased by 1.2 per cent to Rs 851 crore.

Nicholas Piramal India Limited, has posted net sales of Rs 350 crore down 2 per cent for quarter ended September 2005-06. However, net profit has grown up marginally by 0.9 per cent to Rs 54.9 crore during July-September 2005-06.

Ranbaxy Laboratories Limited, India ’s largest pharmaceutical company, has reported a sharp 91 per cent decline in its net profit to Rs 18.4 crore for the third quarter 2005-06, while profits have dipped in the previous quarters also. A drop in generic sales in the US and higher spending on litigation and research and development have squeezed the margins.

Biocon has reported a 21.4 per cent decline in the net profit to Rs 44 crore for the second quarter of 2005-06 against Rs 56 crore in the corresponding quarter previous year.

The government is planning to exempt certain industries such as information technology, transport, construction and maintenance of buildings, roads and bridges from the purview of Contract Labour (Regulation and Abolition) Act, 1970. As of now, some of these industries employ contract workers but the government has the power to prohibit such employment through an official notification. According to the Ministry of Labour, the government has stated that despite the existence of the Contract Labour Act, the increasing use of contract labour is evident in many of these industries. It added that this has to be recognised and an appropriate formalisation should be made in the existing legal framework. According to government officials, this move is expected to formalise the informal sector and ensure statutory benefits such as provident fund and medical benefits under the ‘Employees’ State Insurance Corporation’ (ESIC). At present, the Contract Labour Act provides mandatory provident fund and ESIC benefits. However, contract labourers are deprived of these benefits due its informal nature.

According to the study titled ‘The Other India at Work’ by International Labour Organsiation (ILO), which covered 74 enterprises in 10 clusters in northern India, despite economic liberalization, the unorganised sector workers suffer from low wages and high risks. The survey stated that the employers and employees of these small and micro enterprises on an average earned $ 215 (Rs.9500) per month and $37 (Rs.1700) per month, respectively. The study also pointed out that almost half of the micro enterprises have earnings less than $100 (Rs.4500) per month. Similarly, as many as 84 per cent of the employers experienced variation of 20 per cent or more in their monthly earnings. Such swings were particularly high in case of micro enterprises where 98.7 per cent of the employers faced variations in their monthly income while relatively smaller number of small enterprises (58.9 per cent) faced similar variations. The study has also revealed vital facts about workers’ safety by mentioning that as many as 32 per cent of workers suffered from cuts, 8 per cent from burns and 6 per cent from bruises.

Gemological Institute of India has set up a National Research Centre for diamond and gemstones in Mumbai. Opening of such sophisticated laboratory would enhance consumer confidence in diamond and studded jewellery.

The Haryana government has agreed to set up a special economic zone in collaboration with Reliance Industries.

Commerce and Industry minister has asked exporters to try to increase India ’s exports in 2005-06 to $100 billion as against the target of $92 billion. During 2004-05 exports had surpassed the target to touch $81 billion.

Reliance Capital has acquired the Chennai-based AMP Sanmar Life Insurance Company Ltd. for just Rs.97 crore. Media reports had put acquisition cost anywhere between Rs.100 – Rs.400 crore. According to sources, this is the lowest ever valuation in recent insurance history. AMP has a cash reserve of around Rs.80 crore and a capital base of Rs.217 crore. It has a 9000 strong agents network and 900 employees across 90 offices. It has posted one of the highest growth among the private life insurers by reporting over 170 per cent in the last 8 months in the current fiscal. For the period ended August 2005, the company has underwritten a premium of Rs.42 crore by adding 21,000 new policies.

TCS has acquired Sydney-based IT company Financial Network Services (FNS) for a consideration of $26 million in an all-cash deal. The financial services business for TCS is already $750 million, with this acquisition, TCS will have the capability to position as an end-to-end solutions player in gaining business in the US and European markets.

South India accounts for 61.8 per cent of total information technology (IT) exports from India and has registered a growth of 42.7 per cent in 2004-05. Karnataka ranks as the number one state contributing 36 per cent of the total IT exports. Next in line is Tamil Nadu contributing 15 per cent and Andhra Pradesh 11 per cent according to a survey by Electronics and Computer Software export promotion council.

The cabinet has finally cleared the proposal to hike the foreign direct investment (FDI) limit in the telecom sector to 74 per cent from 49 per cent with some modifications. In hiking the composite foreign investment limit to 74 per cent, the Cabinet has said the remaining 26 per cent needs to be held by resident Indians or Indian companies. Additionally, it has attached certain caveats like barring Indian telecom companies from allowing remote access for repair and maintenance and appointing expatriates at key positions.

*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.