Current Economic Statistics and Review For the Week 
Ended November 05, 2005 (45^th Weekly Report of 2005)

I

Theme of the week:

Civil Aviation: Moving towards a Take-off Stage

The objective of this note is to review the current state of civil aviation as a significant part of economic infrastructure in India and assess various ongoing issues to reform the sector. Air transport is the most popular mode of transport as it serves as the most modern and the quickest modes of transport for public as well as freight movements. As far as the world trade is concerned it is widely dominated by sea transport due to its high cost and non-suitability for carrying heavy, bulky goods. However, transportation of high value light goods and perishable goods is increasingly being done by air transport. 

The aviation industry plays an indispensable role in the growth and efficiency of an economy. It facilitates international trade, travel and tourism and foreign direct investment, thereby enabling the growth of the economy and making it internationally competitive. Over 40 per cent of India ’s exports and imports, by value, are carried by air and 97 per cent of foreign tourists arrive in India by air (Ministry of Civil Aviation). Moreover, the linkage between civil aviation and economic development can also be explained in terms of considerable direct and indirect employment generation. Various studies so far have emphasized the significance of aviation sector in generating employment. A study by the Air Transport Action Group (ATAG) 1998, an independent coalition of member organisations and companies throughout the global air transport industry, had estimated that the total direct economic impact of aviation on gross world output would increase from US$1.36 trillion in 1998 to $1.7 trillion by 2010; 28 million jobs including direct, indirect and induced employment are affected by the civil aviation sector. (The statistics of employment generation by aviation sector in India is not available.) Such a strong linkage between the aviation sector and economic growth necessitates a solid base of favourable as well as growth-propelling policy contours.     

I

Evolution of Civil Aviation in India

After World War II, more than 100 airlines entered in Indian airline industry. Tata group owned Air India (AI) was the largest carrier in the country. In 1953, Air Corporations Act was enforced and the industry was nationalised. The name of Air India was changed to Air India International and the remaining 11 private sector airlines were merged to form Indian Airlines (IA), which removed the scope for competition. Air India ’s role was limited to serving international routes and Indian Airlines used to operate domestic services. This monopoly was perpetuated for the next forty years. For many years later, air travel was perceived to be an elitist activity. This view arose from the “Maharajah” syndrome where, due to the prohibitive cost of air travel, the only people who could afford it were the rich and powerful.

Further in 1990, private sector players were allowed to operate as air taxi operators, but not permitted to operate scheduled services. During the same period, a number of private sector players like Jet Airways, Air Sahara, Damania Airways, NEPC Airlines and East West Airlines emerged with domestic operations.

Open Sky Policy1992

In 1992, India implemented an ‘Open Sky Policy’, which allowed international airlines to operate cargo flights without any kind of restrictions and to charge rate without reference to Directorate General of Civil Aviation (DGCA). Strictly speaking ‘Open Skies’ means unrestricted access by any carrier into the sovereign territory of a country without any written agreement specifying capacity, ports of call or schedule of services. In other words an Open Sky policy would allow the foreign airline of any country or ownership to land at any port on any number of occasions and with unlimited seat capacity. There would be no restriction on the type of aircraft used, no demand for certification, no regularity of service and no need to specify at which airports they would land. Defined in this manner, it is not surprising that Open Skies policies are adopted only by a handful of countries. The policy resulted in improvement in the availability of timely cargo services, decline in cargo rates and increase in volume handled by as much as 15 to 20 per cent per year.

In 1994, the government took a landmark decision of repealing Air Corporations Act, 1953 and allowed private operators to provide scheduled air transport services on a case-to-case basis. The operators had to display a good financial strength, a minimum fleet of three aircrafts, appropriate maintenance and training facilities. The new regulations classified air routes in three categories depending upon the need for air transport services in different regions of the country.

In 1997, the privatisation policy was further liberalised and foreign equity participation of up to 40 per cent was (100 per cent in case of NRIs) was allowed in domestic airline sector. By 1997, there were seven scheduled private airlines and 18 non-scheduled operators in the country. Subsequently, many of them had to wind up their operations except Jet Airways and Sahara Airlines that are currently operating in India .

The Ninth Five Year Plan (1997 – 2002) initiated significant transformation in the sector with the following remarkable developments:

1.               The government considerably disengaged itself from commercial operations of airlines.

2.               The government encouraged an increase in the role of private sector in order to bridge the resource gap as well as to enhance efficiency.

3.                The decision of disinvestments of two public sector airlines namely, Air India and Indian Airlines was initiated. This was decided to improve operational efficiency and financial performance of both the airlines.

4.               Another milestone came with the decision to restructure existing airports at Delhi , Mumbai, Chennai and Kolkata through long-term lease in order to make them would class airports.      

Unfortunately, the decisions that were taken during the Ninth plan were delayed due to varied number of reasons. Further, the main objective of the Tenth Five-Year Plan (2002-07) is to provide world-class infrastructure facilities for efficient, safe and reliable air services. Making provisions for air services to remote and inaccessible areas has also been identified as a priority. Moreover, recognising that the air transport is a field for competitive development, the Tenth Plan lays emphasis on private sector participation in the aviation sector. To achieve the objectives of such an ambitious plan, an outlay of Rs. 12,928 crore has been sanctioned.

According to the Mid-Term Appraisal of Tenth Five-Year Plan, only Rs. 3955 crore, which accounts to 31.6 per cent of the total outlay is estimated to have been spent so far. The bulk of the expenditure in both Air India and Indian Airlines is due to repayment of loans taken for acquiring aircrafts. Similarly, the process of disinvestment of these two airlines could not be completed since the qualified bidders withdrew at the final stage.  Apart from these, there are several projects that are taken by AAI. However, their unsatisfactory formulation is due to incomplete pre-construction activities such as land acquisition. In addition to this, two greenfield international airports at Banglore and Hyderabad are proposed to be developed, in which the respective state governments and the AAI would contribute 13 per cent each towards the equity capital and the private sector will contribute 74 per cent.

As discussed above, revolutioned by liberalisation, the aviation sector in India has been marked by fast-paced change in the past few years. The private sector has infused a considerable dynamism in the sector, not only in terms of investment in airport infrastructure but also in terms of newer air service providers. From being a service that few could afford, the sector has now graduated to being a fiercely competitive industry with the presence of a number of private and public airlines and several consumer-oriented offerings. It is evident that the last two five-year plans, especially the Tenth Plan, incorporated significant restructuring of the entire civil aviation industry in order to introduce greater efficiency and competition.

Although reforms in aviation sector were initiated in the post-reform period, a big push to concrete reforms was received only in the last two years following the recommendations of Naresh Chandra Committee Report tabled in 2003.

Naresh Chandra Committee Report 2003

The Government of India had constituted a committee under the chairmanship of Mr. Naresh Chandra, former Cabinet Secretary, to prepare a road map for the Civil Aviation sector in 2003. The Committee has proved as the most revolutionary stepping-stone in the reform process. It focused on number of fundamental issues regarding reduction in taxes, excise as well as sales tax, improving airport infrastructure, privatisation of loss-making airports and raising of FDI cap in airlines, and thereby paved the way for the much-awaited, new Civil Aviation Policy.

The recommendations of the committee are as follows:

1.                           To make air travel more affordable, the committee had recommended that the taxes, excise as well as sales tax be brought down. Taxes on aviation turbine fuel (ATF) make up 45 per cent of the fuel cost. Nowhere in the world, taxes on aviation turbine fuel were as high as in India . If the rate of taxes is to be brought down to international levels, the cost of air travel will come down by 25 per cent.

2.                           Another major recommendation of the committee was that foreign airlines be permitted to pick up a 49 per cent equity stake in the domestic and international scheduled air transport services. The government at present has implemented the same by allowing 49 per cent FDI in case of domestic airlines.

3.                           Regarding privatisation of Indian Airlines and Air India and the likely transfer of their management to strategic private investors, the committee had recommended that the Government might consider placement of shares of the two airlines with domestic financial institutions (DFIs) and foreign institutional investors (FIIs). The committee had also recommended divesting the Government's stake in Pawan Hans Helicopter Ltd and, thereafter, go for an initial public offering (IPO).

4.                           Further, there are 125 airports in the country but only few of them are profitable. The committee has recommended the government to privatise these airports and also suggested that Mumbai and Delhi airports acting as main hubs to be privatised on propority basis.

5.                           The committee had suggested the creation of an Essential Air Services Fund to provide government subsidy support and to be supplemented by a sector specific cess of 5 per cent on the air fare along with the proceeds from the privatisation of airports. These funds will be available for aviation activities in non-viable areas like the North East.

Importantly, the government has already agreed upon the most of these recommendations. All these major stepladders and developments needed basic institutional pillars to implement various decisions that were taken from time to time.  

II

Institutional Framework and Current Status of Aviation Industry

The institutional framework comprise of four distinct entities –

1.      Institutional Structure

2.      Market Structure 

3.      Leading Airlines or Players in industry

4.      Airport Infrastructure

Institutional Structure 

The institutional structure in civil aviation sector can be broadly classified into three distinct functional entities -

(ii)                Regulatory-cum-developmental,

(iii)               Operational and,

(iv)              Infrastructural

Following are the government agencies, which shoulder these various types of functions-

(i)                 Ministry of Civil Aviation

The Ministry of Civil Aviation performs regulatory function, as it is responsible for the formulation of national policies and programmes for development of civil aviation. The Ministry is also administratively responsible to oversee the provision of airport facilities, air traffic services and carriage of passengers and goods by air.

(ii)               Directorate General of Civil Aviation (DGCA)

DGCA is an attached body of the Ministry of Civil Aviation primarily dealing with safety issues. It’s main functions include implementation and monitoring of stipulated standards regarding licensing of personnel, operations of aircraft, licensing of civil aerodromes, investigation of minor accidents, drafting of aviation legislation etc.

(iii)            Airports Authority of India (AAI)

Airports Authority of India (AAI) is a statutory body under the Ministry of Civil Aviation, which shoulders the responsibility of creating, upgrading, maintaining and managing civil aviation infrastructure both on the ground and the air space, thus performs infrastructural function. At present, it manages 12 international airports and 89 domestic airports, out of which 62 airports are operational. It was set up on April 1, 1995 by amalgamating the International Airport Authority of India and the National Airport Authority of India with a view to accelerate the integrated development, expansion and modernisation of the operational, terminal and cargo facilities at the airports of the country. AAI also provides air traffic management services over entire Indian air space and adjoining oceanic areas with ground installations at all airports and 25 other locations to ensure safety of aircraft operations.          

Market Structure                                                                 

The aviation industry in India , especially with regard to passenger airlines, follows a strictly oligopoly-type structure with the characteristics.

(i)                  An industry dominated by a small number of large firms,

(ii)                Firms sell either identical or differentiated products (the only differentiation here being in service quality and frills offered), and

(iii)               The industry has significant barriers to entry (which holds true both with respect to regulations and huge capital investment required).

Apart from the government agencies, there are number of airline operators which perform operational functions in a specific market structure. 

Leading Players in industry

Currently, only a few large players dominate civil aviation industry. These include government owned public sector undertakings (PSUs) like Air India Ltd., Indian Airlines Ltd. and Pawan Hans Helicopters Ltd. along with the private airlines like Jet Airways, Air Sahara, Alliance Air, Air Deccan, Spice Jet, Kingfisher Airlines, Royal Airways and Go Airways.  With regard to domestic operations, Jet airways has emerged as a market leader, while the government owned airlines like Indian Airlines and Air India combined have lost their market leadership in last couple of years. Jet Airways accounts for as high as 44 per cent of the total market share in the passenger traffic as on March 2004, followed by Indian Airlines and Sahara Airlines. Similarly, Jet Airways has overtaken others in case of market share in total domestic cargo traffic by accounting to 37 per cent of the total share.

It is interesting to note that though the number of players is on rise, especially since last two years due to liberalisation in the sector, the number of aircrafts owned by these private players is too small to cater vast and growing demand in the domestic market. The only exception to this is Jet Airways which has been able to expand it’s business in terms of greater number of aircrafts and consequently wider coverage. The success story of Jet Airways can be attributed to the fact that it has been able to raise huge financial resources by floating its Initial Public Offerings (IPOs) in the market. Recognising the fact that the sector is highly capital intensive, it has raised huge capital to buy aircrafts. Moreover, it has also focused on quality of service and could always differentiate itself on the basis of passenger comfort. 

Airport Infrastructure 

India has a considerably well-developed and large civil aviation network. Currently, there are 125 airports in the country, out of which the important are 12 international airports, 9 custom airports and 24 domestic airports (Appendix A). The operations of these airports are measured in terms of number of aircraft movements, number of passengers handled and the amount of cargo handled by them. It is evident that the number of passengers and the amount of freight handled at various airports has increased drastically by almost 22 per cent and 20 per cent, respectively, in 2004-05 as compared to the previous year. This clearly shows the emerging expansionary phase of the aviation sector.

The airports infrastructure and various air players are managed and controlled by aforesaid government authorities.

III

Issues and Concerns

A take-off stage of the Indian aviation industry raises number of issues, which needs to be addressed. These issues revolve around the privatisation and modernisation of airports, performance of regulatory agencies, effectiveness of civil aviation policy and foreign direct investment. The most talk-about among these is privatisation and a resultant competition in the sector.

1.      Privatisation in civil aviation  

The implications of privatisation could be explained in terms of its various pros and cons. A number of low cost carriers that has mushroomed in a short span of time have benefited travelers to a great extent. Consumers are increasingly finding these carriers profitable due to reasonable air fares, convenient timings and increased coverage due to increase in the number of flights. Moreover, a low cost airline offers a point-to-point service, rather than a hub-and-spoke concept followed by conventional full service airlines. In a hub-and-spoke model, the aircraft flies out from the airport only when all the connecting flights come in. Whereas in the point-to-point model, a passenger traveling on two separate connecting flights is issued two separate tickets. With this he checks out and checks in to take the connecting flight without loss of time.

Another notable feature of low cost carriers is their operational cost structure. Unlike full service airlines in which the passengers are provided with many attendant services like hot meals, frequent flyer programs, spacious legroom etc., the low cost carriers do not provide such kind of frills and also work with minimum number of air hostesses on the flight. Removing business class, storage space for meals and limiting seat pitch makes space for additional seats, which can increase seat capacity of the plane by almost 20 per cent. Moreover, these aircrafts take less time to leave an airport after landing and thereby increases their flight time by 20-25 per cent as compared to full service aircrafts. They also save on distribution costs by disintermediating travel agents and central reservations systems and sell tickets through internet and call centres. Finally, it may be stated that privatisation has brought win-win situation for both, to the customers in terms of low air fares and to various air players in terms of higher market share and greater capacity utilisation. What more, it might reduce considerable burden on the other transport sectors like road and especially railways in future. 

No doubt that the increasing number of low cost carriers have proved to be extremely beneficial to users through a fierce competition that made air travel so easy and affordable to middle class people. However, the story doesn’t end here. There are many difficulties, which remained unanswered, the most crucial being infrastructure development. Is the existing airport infrastructure capable enough to accommodate such a faster pace of growth of airlines?  The issue needs to be seriously taken up and thought of. The problems like delayed flights, lack of sufficient runway space, delayed ground clearance, lack of quality of service and safety of passengers can not be overlooked. Airports of the country are backbone of the civil aviation sector and currently, they are ill-equipped to handle high levels of sustained growth of air passengers. Surprisingly, only 62 domestic and 12 international airports of the country are currently in active use (Investment and Credit Rating Agency). Hubs at Delhi and Mumbai dominate India ’s airport traffic by concentrating over 40 per cent of the total passenger traffic. As a result, a limited terminal capacity at these airports has led to increased congestion, bunching of flights and delays in passenger clearances. This situation is worsened by obsolete infrastructure and poor passenger amenities. On the other hand, may of the smaller airports are not properly utilised. The poor capacity utilisation has seriously impeded an overall growth and development of the sector. Only 10 of the Indian airports are profitable despite the fact that airport charges in India are considerably higher than the international average.

2.      Financing of Airport Infrastructure 

        Financing of airport infrastructure has some inherent problems. These projects have a large element of sunk cost, a very long gestation period and highly uncertain returns on investment based on several assumptions of traffic growth that may fail to materialize. The current pattern of financing is predominantly based on internally generated resources of the AAI. Funding through external assistance, external commercial borrowings, loans and equity has been negligible. The allocation of budgetary grants is limited to certain airports in remote and inaccessible areas. Considering the astronomical sums which seem to be required for modernization and upgradation of existing airports and for the construction of new airports at Mumbai (Rs.10, 000 crore), Bangalore (Rs.1, 600 crore), there has to be a clear public-private partnership so as to utilize state resources in the most optimal manner.

3.       Foreign Direct Investment (FDI)

     FDI cap has been raised to 49 per cent from 40 per cent in domestic airlines in October 2004. However, foreign airlines are still debarred from equity participation in domestic air transport operations. There is an urgent case for reviewing this policy, as operation of airlines requires expertise and new technology as much as it does capital.

      4.  High prices of Aviation Turbine Fuel (ATF)

       The price of ATF in India is 80 per cent more than that of the international levels. In other courtiers, while the fuel cost is usually 10 to 15 per cent of the airline operating cost, it accounts for 30 per cent of the operating cost of domestic airlines in India . This is mainly due to the incidence of excise duty and high sales tax (average 25 per cent) on ATF for domestic air carriers. In effect, on basic ATF price, domestic airlines are required to pay about 40 per cent towards excise duty and sales tax. The excise and customs duty on ATF were halved in the budget for 2004-05 from 16 per cent to 8 per cent and from 20 per cent to 10 per cent, respectively. In the budget for 2005-06, the government has abolished the sales tax on ATF for designated carriers for international carriers. However, high levels of sales tax still remained in most of the states. There is a need to provide ATF on the declared goods category by limiting the sales tax around a level of 4 per cent.

       Moreover, currently the government-owned oil companies enjoy excusive privilege over the supply of ATF. Such a monopoly of these companies is incongruent with the ongoing process of liberalisation in the oil sector. The price of ATF is expected to decline if the airlines are allowed to source it from the supplier of their choice. In order to facilitate this process, Naresh Chandra Committee has suggested that the AAI should offer to buy out the fuel supply hydrants and provide all oil companies an equitable access to such facilities.   

5.      Route Dispersal Guidelines

       It has been experienced that the air operations in the Category II routes, which are meant to connect the northeastern region, Jammu and Kashmir , Andaman and Nicobar Islands and Lakshadweep are loss-making due to their short-haul nature. These shorter routes are commercially unattractive to airlines in view of the competition from alternative modes of transport such as rail and road. The operation of route dispersal guidelines is meant to cross subsidise operations in Category II routes form the profits generated on trunk routes. All the airlines are, therefore, forced to operate part of operations on category II routes. The more appropriate way to ensure reliable air services in these areas would be to provide direct subsidies through minimum subsidy bidding. The amount of subsidy required to support the air operations may be funded by setting up a fund through contributions made by operations on trunk routs and supplemented through other means.

6.      Performance of Regulatory Agencies

        The performance of India ’s international airports, which essentially reflects performance of the regulatory agencies, compares poorly with world standards. Therefore, urgent steps need to be taken through mechanization, particularly at immigration counters and training of staff. Similarly, implementing the projects within the stipulated period stands as a great challenge in front of these agencies. Eg. The progress of certain projects undertaken by AAI during the Tenth Five-Year plan has been sluggish, especially in Northeastern region due to non-availability of clear site, local law and order problems, inclement weather, changes in the scope of projects after their sanction and litigation by contractors. Delays in implementation of these projects adversely affect operational efficiency.

       To improve the performance of airports and to bring overall efficiency in the aviation sector, the Ministry of Civil Aviation is expected to set up Civil Aviation Authority (CAA), an independent regulator and support the growth of the industry. Some of the functions of CAA are proposed as:

(i)                  Set the standards for various agencies and personnel of civil aviation sector

(ii)                Issue license to these agencies and personnel

(iii)               Regulate tariff

(iv)              Arrest unfair trade practices and market dominance through encouragement of entry and fostering of competition.        

  The regulatory agency is thus expected to bring operational discipline in the sector.

IV

Summing up

Overall, the current state of Indian aviation industry portrays mixed shades. On one hand, a significant enthusiasm in the aviation sector is primarily attributed to the increased number of private players and emergence of competitive environment. On the other, it is also evident that there is a need to strengthen infrastructure network by implementing the proposed projects. The current scenario thus shows that India ’s aviation sector is in mid-way on a growth trajectory.    

       No doubt that the government has realised the importance of civil aviation in the growth of the country and it is implementing majority of Naresh Chandra Committee’s recommendations to reform the sector. The sector is now expected to grow at a rate of about 20 per cent per annum for the next four years and the growth would depend on the speed and efficiency of reforms in the sector. Lack of airport infrastructure, high prices of aviation turbine fuel  (ATF) and high level of government control are the major factors constraining the growth of the domestic aviation industry. Further, it has to be recognised that even though the sector is on it’s take off stage, it lags far behind the international standards. According to International Air Transport Association (IATA), the aspects like enhanced safety, cost-effective improvement of infrastructure, reasonable taxation and effective use of technology to simplify the procedures, should be placed on the priority basis.

         It is inevitable for Indian Aviation sector to match pace with global developments in the industry. Certainly, we have begun in that direction. The new comprehensive civil aviation policy and Civil Aviation Authority (CCA) are expected to make the sector more market oriented. A wise policy-making, timely implementation of projects coupled with public-private participation are the major ingredients that would lead to orderly growth and expansion of the sector.

Highlights of  Current Economic Scene

AGRICULTURE     

The country’s seafood exports would suffer in financial year 2005-06 because an US panel has affirmed an imposition of 10.17 per cent anti-dumping duty on shrimp import, which will be imposed retrospectively from July 2004. Shrimp is not only one of the major marine export items, the US is the second largest destination of Indian seafood.. Apart from India , other countries that might face the same anti dumping duty are Thailand , Brazil , Vietnam , China and Ecuador .

Cashew kernels and cashew nut shell liquid export suffered in the first half of the current financial year 2005-06, though marginal increase in the value realization was witnessed. During April-September of 2005-06 total cashew kernels exports dropped by around 13 per cent to 59,627 tonne from 61,724 tonne in the same period last year. Total value realization was Rs 1343.27 crore, which was Rs 1240.4 crore last year. This fall in volume of the exports is attributed to the withdrawal of the export subsidy; consequently exporters have preferred to park their products in domestic market rather than sending abroad.

Marine Products Development Authority of India (Mpeda) has planned joint programmes with Vietnam to develop aquaculture and also for diversification and production of other species where technologies like cage culture, pen culture and raft culture can be explored as Vietnam has the strength in these areas. Both the partners are looking forward to exchange of techniques and sharing of knowledge for the accreditation of these shrimp farms. While Vietnam has already developed organic farms, India has technological know-how for farms, hatchery, feed mills for production of shrimp ad scampi.                 

INDUSTRY

Automobiles

The Union Cabinet has decided to join the 1998 Agreement on Global Technical Regulations (GTR) for Motor Vehicles, which calls for harmonisation of standards relating to safety, environment, energy and anti-theft in automobiles. The move has been welcomed by the auto industry since it will make export of vehicles easier by facilitating equalisation of standards across markets.

INFRASTRUCTURE

Overall

The Union Cabinet Committee on Economic Affairs (CCEA) has sanctioned clearance for setting up of the India Infrastructure Finance Company Limited (IIFCL) as well as the National Investment Fund (NIF).

Power

Certain new clauses have been inserted in the Income Tax Act that will provide relief to power companies, more specifically to Ratnagiri gas and power private limited (RGPPL), the new avatar of Dabhol power company. As per the amendment, the company would now be eligible for capital gains tax exemption on receipt of grants from the erstwhile foreign promotes towards settlement of dues and any income arising from transfer of capital assets from the foreign promoter to RGPPL would also be exempt.

Steel

The Cabinet Committee on Economic Affairs (CCEA) has given its approval to the National Steel Policy (NSP). The policy envisages augmenting the indigenous steel production to over 100 million tonne per annum by 2019-20 from the current level of 38 million tonne per annum, implying a compounded annual growth rate of 0.3 per cent per annum.

Coal  

ONGC (the country’s largest producer of natural gas) and CIL (the country’s largest coal producer) have signed a MoU for coal gasification, with plans to acquire mines abroad. The two, in a 50:50 joint venture, have plans to set up underground coal gasification stations by 2009, with an estimated investment of $15.32 million (Rs 75 crore) for each station. Additionally, the power plant will require an investment of Rs 600 crore. Underground gasification of coal into methane gas would help to convert unminable reserves into commercially usable fuel for industries.

Aviation

The government has amended income tax laws to permit withholding tax exemption to airlines that have plans to acquire or lease aircraft before 1^st April 2006. This would provide airline companies an incentive to expedite their proposed expansion plans, given that withholding tax can jack up fleet acquisition costs by as much as 40 per cent.

Roads

North-South-East-West (NSEW) - the second phase of National Highways Development Programme (NHDP) - that consists of four-laning of national highways is likely to miss its December 2007 deadline and may end only by December 2008 or even later. The main reason for this delay is cited to be a long lull in awarding of contracts – out of a total of 197 projects under NSEW 54 are yet to be awarded and 101 projects are still at various stages of completion.

INFLATION

The annual point-to-point inflation rate based on wholesale price index has gone down to 4.49 per cent during the week ended October 22, 2005 from 4.71 per cent registered during the previous week. The inflation rate was at 7.44 per cent in the corresponding week last year.

The WPI in the week under review has remained unchanged at 197.7 at the previous week’s level (Base: 1993-94=100). The index of primary articles’ group has declined marginally by 0.1 per cent to 196.7 from the previous week’s level of 196.9, due to a decline in the price indices of food articles. The lower prices of food articles are attributed to the decline in the prices of fruits and vegetables, maize, poultry chicken, bajra and ragi . The index of ‘fuel, power, light and lubricants’ group has also declined a tad by 0.1 per cent to 314.7 from the previous week’s level of 315.  The index of manufactured products’ group constituting the maximum of 63.7 per cent of total weight, has risen a bit by 0.1 per cent to 172 from 171.8 of the previous week’s level, primarily due to increase in the prices of food products, ‘wood and wood products’, ‘chemical and chemical products, base metals and ‘machinery and machine tools’.

The latest final index of WPI for the week ended August 27, 2005 has been revised upwards; as a result both, the absolute index and the implied inflation rate moved up to 195.5 and 3.33 per cent instead of the provisional levels of 194.9 and 3.01 per cent, respectively.

Overall, 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 and minerals under the group ‘Primary articles’ in the last couple of weeks. 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. However, the Reserve Bank of India has assured in it’s Mid-Term Review 2005-06, that it would keep a close watch on inflationary movements in the near future and if necessary, would use fiscal and monetary measures in order to contain the same.

BANKING

India ’s corporate sector has borrowed in excess of $2.8 billion from the overseas market during the month of September 2005. According to the latest external commercial borrowing (ECB) and foreign currency convertible bonds (FCCB) data released by the Reserve Bank of India (RBI) for the month of September, about $512.1 million was raised through the approval route, while the remaining $2.3 billion was raised through the automatic route. According to RBI, HDFC was the largest borrower during the month of September, at $608.5 million. Another big borrower during the reporting month was Tata Steel, raising $400 million under the automatic route. Reliance Industries Ltd., raised $348 million for refinancing old loans, while Reliance Energy Ltd. borrowed $250 million towards project financing. The other big names of India Inc. that tapped the ECB route, included Indian Railway Finance Corporation ($75 million), Hindalco Industries ($52.2 million), Tata Sons ($98.5 million), Sterlite Industries ($51.7 million), Ultra Tech Cement Industries ($20 million), Gujarat Ambuja Cement ($19.7 million) and HFCL Infotech ($12.1 million).

RBI has asked the banks to consider the advantages of hallmarked jewellery, while fixing the interest rates and margins on loans against such jewellery. In a notification to scheduled commercial banks, the RBI pointed out that hallmarking of gold jewellery ensures the quality of gold used in the jewellery as to caratage, fineness and purity. Banks will find granting of advances against the security of such hallmarked jewellery safer and easier. The RBI expects that preferential treatment of hallmarked jewellery is likely to encourage practice of hallmarking, which will be in the long-term interest of consumer, lenders and the industry. Currently, it is largely the public sector banks and co-operative banks that offer loans against gold. The large demand for loans against gold jewellery is coming from rural areas. Off late co-operative banks and a few public sector banks are targeting the rural areas, where traditional money-lenders remain very active. The interest rates on advances against gold ornaments and jewellery range from 11.75 to 12.25 per cent for a demand loan and 12.75 per cent for a term loan.

The RBI is keeping a close watch on the balance sheets of banks, namely, Janakalyan Sahakari Bank, the Parivartan Bank and Care Co-operative Bank which are faced with the asset liability mismatch because of high cost fixed deposits (FDs) made 5-7 years ago. These banks had offered FDs to their customers in 1999-2000, having tenure of 5-7 years at interest rates ranging from 10-12 per cent. This occurred, when the overall lending rates in the banking system hovered in the range of 12.5 – 13.5 per cent. The scenario now is significantly different. Interest rates have declined by nearly half.  

PUBLIC FINANCE

The centre’s total expenditure in the first half of financial year 2005-06  is 41.0 per cent of budget estimate (BE). It is almost equal to that during the corresponding period of previous year at 40.9 per cent and seems to be well  within  the limits decided in the budget. Whereas as far as total receipts are concerned, they stood at mere 35.0 per cent during the period, lower than 41.8 per cent  in the corresponding period of the previous year.

On the positive side, the net tax revenue rose noticeably to 35.2 per cent of BE in April-September 2005, higher than 33.3 per cent in the same period of the previous year. Plan expenditure has also registered healthy rise of 41.4 per cent of BE during the first half of the financial year as compared to 36.6 per cent during the same period of the previous year.

Besides this, noticeably non-plan expenditure has fallen to 40.9 per cent this year during April-September from 42.8 per cent in the same period of the previous year.

The fiscal deficit is 55.5 per cent of BE during April-September 2005 compared to 38.7 per cent of BE during the corresponding period of the previous year. This has mainly resulted from lower collections through non-debt capital receipts and rise in plan expenditure.

Thus, the highlight of government finances for April-September 2005, have been rise in tax collections, fall in non-plan expenditure as part of expenditure management. Fiscal deficit seems likely to rule within the budgetary limit at the end of the financial year.

In policy issues, the government is intending to impose a cess so as to form a social security fund for around 37 crore unorganized sector workers who comprise almost 92 per cent of the country’s workforce. 

The government has approved the proposal to operationalise the National Investment Fund (NIF) that will provide funds for social sector projects. The NIF will use 75 per cent of its corpus for the social sector, while leaving the remaining 25 per cent to revive sick PSUs.

The government is also likely to bring about an ordinance within short time to provide relief to loss-making exporters who are collectively facing an additional tax demand of Rs 4,000 crore.

FINANCIAL  MARKET

Capital Markets

Primary Market

Piramyd Retail limited offered five lakh equity shares of Rs. 10 each with price to be determined via 100 per cent book building process. The issue was open for subscriptions between November 10 to November 16.

Secondary Market

The month of November started with a bang with the BSE Sensex closing the week on a positive note. The Sensex witnessed a hefty gain of 387.45 points in three trading days. The markets were open only for the first three days. On Tuesday there was Muhurat limited to an hour. During the week under review, FIIs  and mutual funds were net buyers.

Among the sectoral indices of BSE the highest gains have been registered by BSE METAL followed by BSE CD. While BSE sensex rose by 387 points BSE mid-cap and small-cap rose by 156 points and 198 points respectively.

Sebi has sought powers to file winding up petitions in respect of intermediary companies and attach their bank accounts, share information with overseas regulators, constitute review and enforcement committees and suspend penalties. Regulators have sought the standing committee intervention to amend the Act.these additional powers should be on lines of the section 45 MC of the RBI Act, 1934 and section 43A of Banking Regulation Act, 1949.

The combined average daily turnover of both BSE and NSE since October 5 has jumped to Rs. 9,066 crore and FII gross activity was 32 per cent at Rs. 2,828 crore. Normally, the share of FII averages to 20-22 per cent of the total trading activity in the market.

The BSE market capitalisation has increased to Rs. 21,31,384 core on November 01,2005 from Rs. 14,12,991 crore on November 12,2004. BSE sensex has increased by 1980.09 points to 7944.1 on November 01,2005 from 5964.1 on November 12,2004. Tjhe Nifty also increased by 513.8 points to 2386.75 on November 01,2005 from 1872.95 on November 12,2004.

Derivatives  

Ahemdabad Stock Exchange has sought for the Futures and Options segments trading rights from Sebi, in order to ramp up its trading capacity in derivative market. ASE will be incorporated as Limited Company on December 14,2005.

Government Securities Market

Primary Market

The government has announced the sale of 7.49 per cent 2017 and 7.40 per cent 2035 for notified amounts of Rs 5,000 crore and Rs 3,000 crore, respectively, on November 8.

The yields on 91-day treasury bills auctioned during the week increased from 5.57 per cent to 5.70 per cent.

Secondary Market

The US Fed rate has been hiked by 25 basis points to 4 per cent. The US federal Open Market Committee stated that the elevated energy prices and hurricane related disruptions in economic activity had temporarily depressed output and employment. However, monetary policy accommodation, coupled with robust underlying growth in productivity, was providing ongoing support to economic activity that would likely be augmented by planned rebuilding  in the hurricane affected areas. 

Inflation declined marginally to 4.49 per cent for the week ended October 22 from 4.71 per cent in the previous week, mainly due to fall in prices of essential food items and industrial fuel although manufactured products became costlier.

Despite the decline in inflation rate, the weighted average yield for 8.07 per cent 2017 increased from 7.17 per cent on October 28 to 7.19 per cent on November 4.

Foreign Exchange Market

The six-month forward premia has eased from 0.40 per cent on October 28 to 0.36 per cent on November 4.

The rupee-dollar exchange rate has depreciated from Rs 45.09 on October 28 to Rs 45.41 on November 4.

Commodities Futures

As a part of the on-going transformation of commodities trading, the National Spot Exchange has started the electronic networking of all the 290 agricultural markets in Maharashtra for Agricultural Produce (NSEAP). Further, its being proposed to be extended to the 7,500 agricultural produce markets throughout the country in the next three years.

The latest directive from Forward Markets Commission (FMC) seeks to make it mandatory for a market participant to indicate physical delivery intent at least five days before maturity of the contract. However,  the trader may lose the opportunity to take full advantage of the price discovery process through the online national commodity exchanges . This directive comes into effect for all the contracts launched after November 01,2005.

Following the announcement of demat facilities by NCDEX and MCX, trading in commodity futures has witnessed a huge increase. The number of accounts with depositary services-NSDL and CDSL- has crossed 5,000 mark, this has resulted in a reduction of transaction cost for traders.

INSURANCE

The government has launched a health insurance scheme for 3 lakh handloom weavers and allied workers and their families across the country in collaboration with ICICI Lombard. For subscribing to the scheme, the weavers will have to contribute Rs.200, while the government will contribute Rs.800 through the office of development commissioner.

CREDIT  RATINGS

Crisil has reaffirmed the ‘FA-/Stable’ rating assigned to the fixed deposit programme of Bhartiya Samruddhi Finance Limited (BSFL). The reaffirmation is based on BSFL’s well-qualified and experienced management, its track record and reputation in the micro-finance business, adequate financial flexibility and reasonable capital position.

Crisil has reaffirmed ‘AAA/Stable’ rating assigned to the Rs. 1 billion subordinate debt bonds programme of ABN AMRO Bank. This reaffirmation is based on an outstanding counter-party rating of ‘ AA-/Stable/A-1+’ from Standards and Poor’s which is based on the bank’s very strong franchise in the Netherlands, U.S. Mid-west and Brazil, well-diversified business mix, and healthy asset quality indicators.

Following the Nicholas Piramal India Limited’s (NPIL) acquisition of Avecia Pharmaceuticals (Avecia), UK, Crisil has reaffirmed its outstanding rating of ‘P1+’ assigned to NPIL’s Rs. 1 billion short-term debt programme. This acquisition is in line with NPIL's strategy of expanding its presence in the global custom research and manufacturing space. NPIL benefits from the acquisition by way of access to Avecia's strong customer base, healthy deal pipeline, and internationally approved manufacturing facilities.

Crisil has reaffirmed the ratings ‘P1+’, ‘AAA/Stable’ and ‘AAA/Stable’ assigned to the Citibank’s Rs. 10 billion certificate of deposits programme, Rs. 2.25 billion subordinate bond issuance and Rs. 950 million subordinate bond programme, respectively. The reaffirmation of ratings on Citibank N.A. (Citibank) are based on an outstanding counter-party rating of "AA/Stable/A-1+" from Standard and Poor's which reflects the bank's strong earnings, well-diversified business operations, stringent cost management, and leadership position in the credit cards and investment banking businesses.

Crisil has reaffirmed the ‘AAA/Stable’ rating assigned to the Rs. 2 billion subordinate bond programmes of The Hongkong and Shanghai Banking Corporation (HSBC). The assigned rating is based on the outstanding counter-party foreign currency rating of ‘AA-/Stable/A-1+’ for HSBC Asia-Pacific from Standard and Poor’s (S&P). This S&P rating reflects strong parentage, satisfactory asset quality, stable funding base and good financial profile of HSBC Asia-Pacific.

Crisil has withdrawn the ‘AAA (So)’ rating assigned to ICICI Home Finance Limited’s pass through certificates- Indian Residential MBS Trust Series II and III, as the PTCs have been extinguished and all investor obligations have been fully met.

CORPORATE SECTOR

Godrej Consumer products Limited has acquired Keyline Brands Limited, a London based consumer products company.

The shipbuilding division of Chowgule and Company has received overseas orders to build 12 ocean going cargo vessels of 4450 dead weight tonne each with an estimated cost of Rs 400 crore.

Information technology major, Wipro, has increased its investments in its subsidiaries, Wipro GE Medical System and WeP Peripherals. The company has invested over Rs 25 crore in these subsidiaries.

South Korean consumer electronic giant LG is setting up its mobile phone and DVD player manufacturing unit at the Ranjangaon Industrial Estate near Pune at a cost of Rs 500 crore.

Mahindra and Mahindra Limited would transfer its light commercial vehicles business to Mahindra International Private Limited for Rs 48.4 crore.

Maruti Udyog Limited has reported a 14.5 per cent rise in the overall domestic sales in October 2005 to 50,308 units.

Ashok Leyland is one the edge to form a joint venture with a Chinese firm to meet growing domestic demand for light commercial vehicles.

Bharat Petroleum Corporation Limited will soon invest Rs 2000 crore in a new 120,000 barrel per day refinery in central India .

Berger Paints has registered 26 per cent rise in sales to Rs 553.4 crore and a 73 per cent jump in net profit to Rs 36.8 crore during April-September 2005.

Fast moving consumer goods (FMCG) major, Hindustan Lever Limited (HLL), has posted a net profit of Rs 326 crore for the third quarter ended September 2005. Domestic FMCG sales has grown up by 16 per cent to Rs 2383 crore during July-September 2005.

Aurobindo Pharma has registered a 19 per cent rise in the net sales to Rs 319.5 crore and 42 per cent increase in the net profit to Rs 3.6 crore for the quarter ended September 2005.

Jindal Stainless has reported 8 per cent rise in its net profit to Rs 44 crore for the quarter ended September 2005.

Glenmark Pharmaceuticals has suffered a 52 per cent fall in net profit at Rs 13.8 crore during July-September 2005.

Hindustan Petroleum Corporation has reported a net loss of Rs 22 crore for the quarter ended September 2005 as compared with a profit of Rs 294.3 crore in the same period previous year.

Hindalco Industries Limited, a flagship company of Aditya Birla group, has suffered a 7 per cent decline in its pet profit at Rs 276.5 crore for July-September 2005.

LABOUR

The government is planning to introduce the bill called ‘older Persons (Maintenance, Care and Protection) Bill’ in the winter session of parliament, which will allow old parents to reappropriate properties willed to their wards if they fail to take care of them. The proposed legislation aims to provide a trampoline for elders if they are neglected. It may further also provide for old age pension apart from the provision of at least one old age home in each district and specific health provisions for the elderly. It thus, addresses financial, housing, clothing and companionship requirements of the elderly. It proposes to make it obligatory on the part of families in case the older person lives below poverty line. It also proposes to set up tribunals headed by sub-divisional magistrates, where older persons can apply to claim maintenance from their children including adopted or step children and grandchildren.      

EXTERNAL SECTOR

The target plus scheme, which is a reward scheme for exporters, may be abandoned by the government due to its non-compatibility with the WTO norms. The two other schemes presently being scrutinised by a two-member committee of officials may be spared as they do not violate WTO norms and the flow of benefits to the exporters is relatively more transparent. As per the target plus scheme, exporters achieving a quantum growth in exports would be entitled to duty free credit based on incremental exports, which is substantially higher than the general actual export target fixed. Rewards were granted based on a tiered approach. This scheme is incompatible with WTO norms as it is based on past performance.

According to an Exim Bank study, the north-eastern region accounts for over three-fourth of total handicraft production, however, its share in India ’s total handicraft export is even less than 1 per cent.

It is almost certain that India ’s seafood exports would suffer this year (2005-06) because a US panel has affirmed the imposition of 10.17 per cent anti-dumping duty on shrimp imports and shrimp is the major Indian marine export.

INFORMATION TECHNOLOGY

Mphasis BFL Group has posted a net profit of Rs.40.16 crore, up by 27.4 per cent for the quarter ended September 30, 2005, compared with Rs.31.51 crore for the corresponding quarter of the last year.

Online sales in last three weeks on account of Diwali & Eid festival recorded a significant rise of 117 per cent to Rs.115 crore this festive season against Rs.53 crore last festive seasons according to Internet & Mobile Association of India (IAMAI). Of the 32 million internet users in India about 4.15 lakh made purchases online (around 8.1 lakh transactions in last three weeks). The average transaction value was Rs.1,420. These purchases account for more than 10 per cent of total online sales in India . Digital cameras, mobile phones, DVD players, microwave ovens, apparel, jewellery and watches topped the festival shopping list, followed by mithai, chocolates, dry fruit and flower hampers. The growth figures indicate that online shopping is coming of age and consumers are keen to shop on the net.

India’s largest software exporter TCS has bagged the country’s biggest ever outsourcing deal worth $848 million (£486 million) 12-year contract from UK’s insurance and pensions major Pearl Group Ltd. to provide non-voice processing of life insurance and pension policies. This is also the largest manpower transfer deal done by any Indian BPO company. TCS will form a subsidiary in UK that will take over Pearl ’s existing business processes based in Peterborough – a 1700 seat centre. Pearl Group and TCS will hold 20:80 of the new subsidiary’s equity.

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

LIST OF WEEKLY THEMES

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