Current Economic Statistics and Review For the Week 
Ended December 3, 2005 (49^th Weekly Report of 2005)

I

Theme of the week:

Horticulture Development: Imperative for Crop Diversification*

Introduction:

Horticulture is a generic term, which encompasses cultivation of fruits, vegetables, flowers, spices, plantation crops, medicinal and aromatic plants, roots and tuber plants, cashews etc. Bestowed with the diversified topography, soil and climatic conditions, India is suitable for growing large variety of horticulture crops. Horticultural products play a unique role as an avenue for crop diversification and thereby improving the economic condition of the rural people by generating more employment opportunities and sustaining production on small land holdings. Besides providing nutritional security, this sector not only supports a large number of agro-industries but also helps in export earnings. The horticulture sector accounted for 8.5 per cent of the gross cropped area covering 17.2 million hectares of land in 2003-04. The sector’s contribution to the agricultural GDP was 30 per cent with production standing at around 156 million tonnes during the same period.

Major Horticulture Crops

The production in this sector (Table 1) has grown by about 62 per cent from 96.5 million tonnes in 1991-92 to 156.1 million tonne (provisional) by 2003-04. In India , Floriculture is still in the nascent stage and its contribution in the total horticulture production and exports is very miniscule.

Fruits:  Although India , was the second largest producer of fruits after Brazil in 2003-04, however it held the top position in production of mango, banana, sapota and acid lime. With the production of fruits provisionally standing at 47.5 million tonnes in 2003-04, India ’s share in the world fruit production was 10 per cent in the same year. India accounted for about 54.1 per cent of world mango production and 11 per cent of world’s banana production.

Mango is one of the most important fruits accounting for over 28 per cent of the total fruit production of the country next to banana, which contributes nearly one third of the total fruit production. Citrus fruits rank third in the production with a share of 12.6 per cent. Apart from some arid zone fruits like fig and pomegranate. Some temperate fruits and nuts like pear, peach, plum almond, walnut, apricot are also produced in the country. As per National Horticulture Board, share of major fruits in the total fruit production is displayed in the following chart.

A unique feature of growing fruits in India is the advantage of its climatic variability. For instance, ‘Dashehari’ mango grown in south India is available two months earlier than the crop in north India . This climatic variability could be meaningfully utilised for extended harvest of these fruit crops.

With the share of 14 per cent, Andhra Pradesh was the major producer of fruits in 1991-92 followed by Maharashtra (12.3 per cent) and Karnataka (9.3 per cent). However, in 2002-03, Maharashtra , Andhra Pradesh and Uttar Pradesh were the top three producers, with their respective contributions standing at 18.6 per cent, 16.4 per cent and 4.3 per cent.

Vegetables: Vegetables constitute the most important food next to cereals and milk. Vegetable production has recorded 46 per cent of growth over a decade and has stood at around 85 million tonnes in 2002-03. The production has provisionally risen to 90 million tonnes in 2003-04 (Table 1). Brinjal is the major vegetable crop and it contributes to 9.4 per cent of the total production of the vegetables followed by tomato (9.0 per cent), cabbage (6.4 per cent). However, Potato, which is a tuber vegetable, constitutes the highest share of 27.3 per cent in the vegetable production.

India was the top producer of vegetables (90 million tonnes) in 2003-04; it was the prime producer of cauliflower, second largest producer of onion and third largest producer of cabbage in the world.

In 1991-92, Uttar Pradesh contributed about 16.5 per cent to the total vegetable production and held the fist position followed by Bihar (14.8 per cent) and Orissa (12.4 per cent). However, by 2002-03 West Bengal , with its share of about 20.5 per cent, has emerged as the top producer of vegetables in the country. While Uttar Pradesh with 18.6 per cent share has slid down to second position, Bihar has occupied third position with a share of 9.7 per cent.

Spices: Spices constitute an important group of horticultural crops and are defined as vegetable products or mixture thereof, free from extraneous matter, used for flavouring, seasoning and imparting aroma in foods. The term applies equally to the product in the whole form or in the ground form. India is known as the home of spices and produces a wide variety of spices like black pepper, cardamom (small and large) ginger, garlic, turmeric, chilli and a large variety of tree and seed spices. Almost all the states grow one or more spices.

Spices have registered a growth of 63 per cent to touch 3.1 million tonne in 2002-03 from 1.9 million tonne in 1991-92. Chilli held the first position among all the spices with the production of 1.1 million tonne in 2002-03 and a share of approximately 30 per cent in total spices production. Turmeric (0.6 million tonne) has occupied the second position and mustered seeds (0.4 million tonne) have ranked third.

Exports of horticulture crops:

            Among horticultural commodities, India is exporting fresh fruits, vegetables, processed products of fruits and vegetables, cut & dried flowers, medicinal and aromatic plants, seeds, spices, cashew kernels and their products, tea and coffee. Exports of horticultural products have increased from US $ 1009 million in 1992-93 to US $ 1727 million in 2004-05 recording a growth of 71 per cent. However, its share in total exports of the country has fallen fro 5.4 per cent I 1992-93 to 2.2 in 2004-05.

 Tea was the major foreign exchange earner in 1992-93 with the share of 33.4 per cent in total horticultural exports of the country, followed by cashew nut with the share of 25.5 per cent. However, in 2004-05 spices emerged as a major foreign exchange earner (Table 2). Fresh fruits and vegetables contributed about 21 per cent to the total exports and occupied the third position.

 Horticulture during all Five Years Plans

The initial five year plans and Green Revolution assigned priority to self-sufficiency in foodgrain production and did not provide much impetus to horticulture sector. However, gradually importance of horticultural sector as a one of the major thrust areas in the economy was widely acknowledged. Separate allocation for horticulture started only from the IV Plan onwards. There was a quantum leap during the VIII Plan in financial allocation for horticulture development programmes, which was sustained even during the IX Plan.

I^st five year plan (1951-52 to 1955-56)

Horticultural crops covered little over one per cent of the total cropped area during the first five-year plan. The major factors impeding the growth of horticulture crops were haphazard lay-out of the gardens, employment of inferior seeds and varieties, absence of regular pruning, training, and weeding, inadequate measures against insect-pests and diseases etc. The recommendations made to improve this situation pertained to organising fruit and vegetable growers on cooperative lines for raising nursery plants, controlling pests and diseases, and for marketing fruit and fruit products, popularising kitchen gardening in urban areas by supplying seeds and plants and technical advice, carrying out research on modern and indigenous methods of fruit preservation, establishing a Fruit and Vegetable Development Board on a country-wide basis by enforcing quality standards, supervising research, maintaining statistics and giving technical advice to states which need it.

II^nd five year plan (1956-57 to 1960-61)

The second plan provided Rs. 8 crore for horticultural development. During the Second Plan about 166,000 acres of new orchards were planted and about 132,000 acres of old orchards were rejuvenated, and over 4,000 gardeners were trained. Provision was also made for the training of the horticultural staff in all states. Special attention was to be given to the organisation of marketing cooperatives for fruit and vegetable growers. For developing fruit and vegetable preservation, assisting the canning industry and setting up cold store plants, the Ministry of Food and Agriculture provided a sum of Rs. 1.75 crore. Production of vegetables was proposed to be encouraged, especially in the neighbourhood of towns by supplying seeds and seedlings of quality on credit and making technical guidance available to the vegetable growers.

III^rd five year plan (1961-62 to 1965-66)

The total area covered under fruits and vegetables doubled and stood at 6 million acres compared to the coverage in the previous plan.  Besides continuing schemes already in operation, the plans of states provided for the establishment of progeny orchards with nurseries and garden colonies. The nurseries were to help in the supply of planting material of reliable parentage and guaranteed performance. The plan included programmes for the increased production of subsidiary foods like primarily potatoes, sweet potatoes and tapioca and other vegetables and fruits and certain processed and derived fruits. Their greater use was to help diversify the pattern of food consumption and promote balanced nutrition.

IV^th Five year plan (1969-70 to 1973-74)

Research and Development was paid more attention during this plan. An important scheme was proposed to set up a Central Research and Training Institute to help in the adoption of technological improvements in the marketing of perishable products like fruits and vegetables. This Institute was expected to undertake trial and demonstration of new equipment for cleaning, grading, packing, transport and storage of fruits and vegetables and impart training in the commercial use of new techniques for marketing.

V^th five year plan (1974-75 to 1978-79)

The projects involving construction of storage (including cold stores), augmentation of the transport fleet, establishment of small processing units and testing laboratories, along with the training of staff were carried out to increase the infrastructural support to the sector.

VI^th Five year plan (1980-81 to 1984-85)

The Sixth Plan aimed at achieving an additional production of 2.5 million tonnes of fruits and 4 million tonnes of vegetables. Emphasis was  laid on strengthening research on vegetables and horticultural crops. A very significant aspect of the Sixth Plan was the proposal to arrange for the multiplication and distribution of appropriate seeds and planting material. It was suggested that fruit trees can be introduced in all agro-forestry programmes and in other projects such as hill, desert and tribal area programmes for development of these areas Similarly the need for tapping the potential of fresh and processed vegetable and fruits for the export purpose was emphasised.

VII^th five year plan (1985-86 to 1989-90)

During the Seventh Plan, out of plan allocation of Rs 24 crore for horticulture, a sum of Rs 21.94 crore was utilised for horticulture promotion implemented under different schemes. Research infrastructure was given a boost by setting up various research centres and university of horticulture. The plan proposed to integrate horticulture with agriculture in hill areas/ lands, dryland areas and coastal saline areas for diversifying agricultural production and raising incomes in these areas.

VIII^th five year plan (1992-93 to 1996-97)

The allocation for horticulture jumped to Rs 1, 000 crore in the Eighth Plan. A large number of concessions, subsidies and incentives were given to the growers and exporters. There was a substantial increase in the area and the production of horticulture crops during the Eighth Plan. The production of entire horticulture sector rose from 961 lakh tonnes to 1410 lakh tonnes during the same period. The plan was oriented towards bringing qualitative improvement in the horticultural products. For speedy development of horticulture use of modern technologies like growing horticultural and floricultural crops in controlled conditions such as green/glass houses, plasticulture, drip irrigation, and tissue culture was encouraged. For export of horticultural products, suitable selection of varieties of fruits, vegetables and flowers including orchids in the potential areas were to be identified and supported. During the Eighth Plan, the emphasis was given on production of quality planting materials, area expansion, improvement in quality and increase in productivity, of horticulture crops.

IX^th Five Year plan (1997-98 to 2001-02)

The Ninth Plan allocation was raised to Rs 1,400 crore, a nominal increase of 40 per cent over the last plan. There was considerable expansion in area under various horticultural crops and increase in their production during first four years of the Ninth Plan. The development strategy during the Ninth Plan was focused on improving productivity and the quality of the horticulture crops through upgradation of production and farming technologies, supply of quality seeds and planting materials, technology transfer through demonstrations, reducing post harvest losses and improving marketability of produce, developing a strong base for supply of other critical inputs and human resource development. A separate scheme for horticulture development through plasticulture was implemented during the Ninth Plan, aimed at promotion of protected cultivation through greenhouse technology and increasing micro-irrigation facilities through drip and sprinkler systems. Considering the phenomenal potential for cultivation of various horticultural crops in the northeast region, a Technology Mission for Integrated Development of Horticulture was also introduced towards the end of 1999-2000. A Central sector scheme for development of infrastructure for post-harvest management and commercial horticulture was also came into operation through the National Horticulture Board.

X^th Five Year plan (2002-03 to 2006-07)

The thrust areas identified in this plan for boosting the horticulture sector consist of area expansion, augmenting production, improving productivity, reducing cost of production, improving quality of products, value addition, promotion of marketing and exports, strengthening of credit and organizational support and human resource development. As for the infrastructural, emphasis was on a network of nurseries and seed farms, depending upon the agro-climatic conditions and crop specific requirements of various areas. The plan proposed a massive seed production and distribution programme to be organised at the national level with suitable linkages with institutes like Indian Council for Agricultural Research (ICAR). Apart from productivity improvement, the measures include cautious utilisation of land and water resources, promotion of intercropping and promotion of off-season production of vegetables in temperate regions through poly houses.

Factors impeding the growth:

Inappropriate handling at the primary stage of production results in loss of produce. Delay in removing / transporting the produce immediately to a packing shed after harvesting (e.g. mango) lead to spoilage loss from extreme heat in the field.

The maturity indices in most of the horticultural crops are either not available or not followed by the farmers resulting in harvesting of these crops at varied maturity levels. Thereby, a large quantity of produce has to be rejected while sorting and grading due to under or over maturity/ripening e.g. fruits and vegetables. Furthermore, once such a lot is exposed to controlled atmosphere condition or modified atmosphere packaging, the reaction of the commodity is varied, making it difficult to standardise the post-harvest treatments.

The horticulture produce suffers heavy post-harvest losses in the absence of adequate post-harvest and marketing infrastructure viz; precooling units, packing and grading sheds, short and long term cold storage facilities, refrigerated containers, storage and phytosanitary facilities at airports. These results in a wide gap between the gross production and net availability. According to the Swaminathan Committee (1985), post harvest handling accounts for 20 to 40 per cent of the losses at different stages of grading, packing, storage, transport and finally marketing of both fresh and processed products. The weak processing infrastructure has been one of the main factors affecting effective utilisation of the raw materials resulting in huge post harvest losses.

The high capital cost involved in establishing an orchard / a plantation, or rejuvenation of existing old unproductive plantation poses serious constraint in area expansion under these crops. The situation becomes all the more difficult in view of the large number of small holdings devoted to these crops which are essentially owned by weaker section, who have no means to invest, nor can afford to stand the burden of credit even if available.

As mentioned earlier, horticulture is emerging as one of the major thrust areas, however, as compared to overall agriculture, has always received less attention in terms of financial support. Strengthening of the backward linkages demand huge investments in the sector. Hence efficient credit system on competitive cost terms is required, which will provide the much required stimulus to the sector and help survival of small growers as well

Presently differential tax structure for diverse agricultural commodities is in existence within and outside states. This needs review and rationalisation. The current low prices for rubber, tea, coffee, coconut, and oil palm have acted as deterrent particularly to small farmers to make adequate investment in plantation.

About 75 per cent of the farmers sell their produce at the farm level to the village merchants, retailers, big producers or pre-harvest contractors. They cannot afford to transport their produce to the distant “Mandies” on account of non-availability of refrigerated transport and storage facilities, high transportation cost, malpractices in the market such as heavy deductions and required free samples of their produce. The inadequate infrastructural facilities not only affect availability and quality of the horticulture crops but makes investments risk oriented apart from reducing net realization of the farmers.

Importantly, serious price fluctuations commonly observed in the Indian horticulture scenario lead to glut situation in individual commodities and lead to more of the small and marginal farmers by the traders and commission agents.

As for exports, narrow product range, high rate of tariffs and different check imposed by importing countries, and absence of tailor made products form the part of key constrains. Lack of appropriate quality standards, improper material used for packing and packing itself indirectly hampers the exportability of the horticulture output.

Initiatives taken for enhancing the productivity 

Having achieved self sufficiency in food grains, the challenge before the country is to produce more with higher nutritional quality and carry out production activities on a continually shrinking agricultural land area and thus to raise productivity. This requires developing and adopting newer techniques, in an ecofriendly way. This also applies to horticulture. The country is to more to ‘Hi-tech Horticulture’, which means a number of new measures summerised below:

Green houses, also known as protective cultivation, have set the example of successful application technology to horticulture. Green houses are framed or inflated structures covered with plastic material or glass in which crops could be grown under partially controlled environment which is large enough to permit normal cultural operation manually. An environment conducive for the development of the crops is created artificially to cultivate better quality flowers and vegetables out of season, ensuring both the requirements of temperature and tropical climate.  A large number of greenhouses have come up around Bangalore and Pune for export of roses. States like Maharashtra, Madhya Pradesh, Karnataka, Kerala and the North Eastern States have also brought significant area under green houses.

Micro-irrigation and Drip irrigation are two systems that form a part of the most commonly used methods of irrigation. While the micro-irrigation system consists of a network of pipes along with a suitable emitting device, in drip irrigation system, water is applied at a low rate for a longer period at frequent intervals near the plant root zone and through a lower pressure delivery system to the plant. The latter system has become very successful for irrigating horticultural crops like mango, banana, grapes, pomegranate, guava, citrus, brinjal, cucumber, okra and capsicum.

Another less expensive, eco-friendly and sustainable method widely used is application of bio-fertilizers. These are inputs containing micro-organisms capable of mobilising nutritive elements from non-usable form to usable form through biological processes.  However, for intensive and economical crop production, the best solution for higher productivity is fertigation, where both water and fertilsers are delivered to growing crops through drip irrigation system. Fertigation ensures higher and quality yield along with savings in time and labour making it economically profitable. This has been already experienced by large number of farmers cultivating grape, pomegranate and banana.

Micro-propagation is well known as a means of producing millions of identical plants (‘clones’) under aseptic conditions, in a relatively short period of time, independent of seasonal constraints. An added advantage is production of pathogen-free planting material. Large scale promotion of this technology was taken up during the VIII plan under the Centrally Sponsored Scheme on Integrated Development of Horticulture.

On the policy front, the government has declared horticulture as a major thrust area. The Agriculture Ministry has come out with the multi-crore National Horticulture Mission (NHM). The Mission aims to achieve the production of 300 million tonnes by 2011-12, focusing on research and development, post harvest management, marketing and risk management in the form of crop insurance. Special attention would be provided to promote the agricultural produce through establishment of Agri-Economic Zone as a part of this mission. The mission is expected to focus on promoting horticultural produce and value addition by giving away incentives for setting up horticulture processing industries and food parks in potential areas and linkages between markets and processing industry.

Summing up:

India is emerging as a leading player in the global horticulture scenario. There is a great potential on both demand and supply side of the horticulture market in the country. Although, the advantages of the large research manpower pool and the abundance of raw material are clouded by disadvantages such as low level of productivity, poor infrastructure and low investment. The weak linkages between research and application, low levels of seed replacements and imbalance use of fertilisers are inhibiting productivity. However, as a result of a number of thoughtful research, technological and policy initiatives and inputs, horticulture has become a sustainable and viable venture for the small and marginal farmers. Besides, entrepreneurs are also being attracted for taking up horticulture as a commercial venture. The Union Government has recently proposed to spend Rs 15000 crore in the perishable sector covering its backward and forward linkages. This will help create environment conducive for investments in this sector.  Indeed a planned approach towards the sector will lead the horticulture industry to grow fast and flourish widely.

References

GOI (2004-05), Economic Survey,  Ministry of Finance.

www.hortibizindia.org

www.indiabudget.nic.in

www.planningcommission.nic.in

* This note is prepared by Pallavi Oak.

Highlights of  Current Economic Scene

AGRICULTURE     

Reports from the different states have reiterated that wheat sowing has been completed over 10.1 million hectares this season till Dec 01, 05 against 7.9 million hectares completed during the same period last year. The increase is accounted for higher area coverage in Madhya Pradesh, Uttar Pradesh and Rajasthan.  Wheat sowing is still underway. The copious rainfall in later part of monsoon season (in September) during 2005-06 has left sufficient moisture in the soil to allow extensive water planting in current rabi season. If the agro-climatic factors continue to be favourable leading to increase in the area coverage, the Agriculture Ministry is expecting the production level to surpass the target of 76 million tonnes, which will be 4 million higher than the wheat production in 2004-05.

The government has relaxed the norms for procurement of rice in Punjab , Haryana and Madhya Pradesh for the kharif marketing season 2005-06 (October-September). The step has been taken to help the farmers to recover the losses owing to the widespread damage and deterioration in the quality suffered by the crop due to unusual rains. In Punjab and Haryana, Food Corporation of India (FCI) has been allowed to accept raw rice- both grade A and common- with 3 per cent damaged grains as against the existing norm of 2 per cent. An additional 1 per cent relaxation has been allowed for rice with pinpoint damage i.e. rice with black spots.

To safeguard the Rs. 14,000 crore domestic poultry industry from the avian flu, the government has banned poultry and wild bird imports for six months. Although no case of bird flu has been detected in India . The ban on imports has been introduced as a part of the precautionary measure. Poultry, in India has made an impressive growth during the last few decades to increase total poultry strength to 50 crore being supported by the organized private sector. At present India ranks among the top five nations in egg production in the world with the total annual egg production of almost 45 billion. 

Kerala and Punjab have been identified for setting up of two agro processing parks. European Union is investing about $100 million for the two states, each. EU funding would bring in system of logistics, water treatment plants, electricity generation, waste management, while the infrastructural facilities have to be provided by these two states. Fruits, vegetables, marine products would be produced as per EU standards in these parks

INFRASTRUCTURE

Overall

The growth of infrastructure industries has slowed down to 4.9 per cent in October 2005 from 15.9 per cent a year ago mainly due to a fall in the output of crude petroleum and refinery products. For the period of April-October 2005, the six core infrastructure industries together have posted a growth of 4.6 per cent as compared to 6.8 per cent during the same period in 2004.

Power

The cabinet has approved amendments to the Electricity Act of 2003, to gradually reduce cross-subsidy, to empower the police to investigate power theft cases under the code of criminal procedures act, and specify that rural electrification in the joint responsibility of the states and the centre.

Non-Conventional Energy

The state cabinet has approved the proposal of Maharashtra Electricity Generation Company Limited (Mahagenco) to set up a Rs 418 crore trust for creating power generation capacity of 1000 megawatts through non-conventional energy sources over the next three years. The fund is to finance projects of co-generation plants based on bio-gas produced in sugar factories, wind energy plants, mini hydro-power plants, power plants based on solar energy and on solid waste.

Five thousand farmers in Maharashtra have signed up to cultivate jatropha, the new plant for producing bio-fuel, and sell jatropha seeds to IOC, BPCL and HPCL. The farmers can sell the seed at Rs 5 per kilogram, which is 50 paise higher than the price contracted by the Chhattisgarh government, or sell the extracted oil at Rs 25 per litre.

Aviation

The Maharashtra government is in communication with European aircraft manufacturer Airbus and America ’s Boeing for setting up aircraft maintenance, repair and overhaul (MRO) facility at Nagpur airport. The projects initial investment will be Rs 700 crore and is expected to go up to Rs 1500 crore in its final phase.

INFLATION

The annual point-to-point inflation rate based on wholesale price index has gone up to 4.32 per cent during the week ended November 19, 2005 from 4.20 per cent registered during the previous week. The inflation rate was at 7.23 per cent in the corresponding week last year.

The WPI in the week under review has declined by 0.3 per cent to 198.1 from the previous week’s level of 198.6 (Base: 1993-94=100). The index of primary articles’ group has declined considerably by 0.9 per cent to 198.1 from the previous week’s level of 199.9, mainly due to a reduction in the price indices of food articles by 1.1 per cent to 199.5 from 201.7 in the last week. This has been coupled with a decline in the price indices of non-food articles by 0.5 per cent to 182 from 183 in the previous week. The lower prices of food articles are attributed to the decline in the prices of fruits and vegetables, masur, tea and fish-marine. Similarly, the lower prices of non-food articles are attributed to the declined prices of sunflower, cotton seeds, raw cotton, groundnut seeds and mustard seeds. The index of ‘fuel, power, light and lubricants’ group has declined marginally by 0.1 per cent to 312.1 from the previous week’s level of 312.4. The index of manufactured products’ group constituting the maximum of 63.7 per cent of total weight, has remained unchanged at the previous week’s level of 172.7.

The latest final index of WPI for the week ended September 24, 2005 has been revised upwards; as a result both, the absolute index and the implied inflation rate moved up to 197.2 and 4.34 per cent instead of the provisional levels of 196.5 and 3.97 per cent, respectively.

Overall, the rate of inflation has remained reasonably contained in the range of 4 to 4.5 per cent in the month of November. 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. Moreover, the Finance Minister has also assured over price stability by emphasising on fiscal measures, if necessary. He added that the current rate of inflation, which is below 5 per cent is not a cause of concern.   

BANKING

The Reserve Bank of India (RBI) has decided to discontinue the special electronic funds transfer system (SEFT) from January 1, 2006, and has put in place a plan for all banks to migrate to the national electronic funds transfer (NEFT) system.  Initially, the NEFT will start with eight banks and progressively increase to cover all the banks, which are presently participating in the SEFT clearing. Meanwhile, the RBI has proposed to migrate all the present SEFT banks to NEFT by December 15, 2005. NEFT is structured based on financial messaging solution (SFMS) platform and is public key infrastructure (PKI) enabled. The RBI has advised banks to be ready with SFMS so as to join NEFT at an early date.

The total credit flow to agriculture in the first-half of the current financial year by the commercial banks, co-operative banks and regional rural banks was to the tune of Rs.83,502 crore, about 111 per cent of the target of Rs.75,000 crore.

To promote efficiency and provide financing to small-scale industries in Gujarat, SIDBI is working on expanding the number of branches in the state to six from the existing three branches at Ahmedabad, Surat and Baroda .

PUBLIC FINANCE

Tax Collections

The net tax revenue of the centre increased by 24 per cent during April-October 2005 as the revenue collected through the corporation tax and the customs duty increased by 50 per cent and 21 per cent, respectively, during the first seven months of the financial year 2005-06. The Budget estimate (BE) is 21 per cent for the growth of tax revenue during the financial year 2005-06. With buoyant growth in corporation tax and customs duty, the BE 2005-06 for the net tax revenue seems very much attainable. The income tax collections declined by 4.5 per cent during  April-October 2005. Non-plan expenditure is 49.2 per cent whereas plan expenditure is 48.8 per cent of the BE 2005-06 during April-October 2005 while revenue deficit is 73.7 per cent and fiscal deficit is 60.9 per cent of BE 2005-06. during the first seven months of the financial year 2005-06.

The Delhi government has estimated a revenue loss of Rs 1,100 crore  from the abolition of the central sales tax (CST). At present, major manufacturing states such as Maharashtra ,  Haryana, Tamil Nadu, Andhra Pradesh and Karnataka benefit from the CST. Once the CST is abolished, Maharashtra is expected to lose close to Rs 5,000 crore and Haryana around Rs 1,100 crore. The decision to lower the CST on inter-state transactions from 4 per cent to 2 per cent from next financial year was taken at the last meeting of the empowered committee of  state finance ministers. Major states including Delhi are demanding to bring the taxation of services under states’ purview to compensate for the revenue of losses that will arise from the abolition of CST. If conceded, the Centre may end up losing around Rs 8,000 to Rs 10,000 Crore.

 VAT

The finance ministry as received compensation claims for about Rs 1,400 crore  and a sum of Rs 776 crore has already been disbursed. The total outgo for compensation this year is likely to be lower than the Rs 5,000 crore allocated and there would likely be right back at the time of the revised estimate. The optimism for lower outgo stems from the fact that not all States have implemented VAT. Only 24 States and Union Territories have so far gone in for the new tax. Indications are that even if the remaining States incorporate VAT by January 1 next year, they can at the most make claims for January and February within March 31. The claims for March 2006, if  any, for all the States , are likely to fall only in the next financial year.

Policy issues

The provident fund  and life insurance policies would not be taxed as per the EET (exempt exempt tax) system of taxation. This implies that the existing taxation system will continue on the saving instruments. Under the EET system contributions and accumulations on investments are exempt from the purview of income tax and the tax is levied only at the time of the withdrawal. 

The cabinet has approved the Taxation Laws (Amendment Bill) to replace the Ordinance.

State governments insisting on value addition to iron ore and other minerals mined within states may be offered a compromise formula, shifting royalty from the tonnage basis to ad valoerm, so that they can reap the benefits of the revenues earned by the industry. A reasonable export tax linked with the international price of iron ore has also been mooted.

There is pressure on the finance minister to amend the fringe benefit tax (FBT) in the forthcoming budget. Since its incorporation the India Inc. has voiced discontent about it to the extent that the legal recourse has been undertaken for the purpose. The argument is already filed in with the states of Andhra Pradesh, Gujarat and Tamil Nadu and now two writ petitions challenging FBT have been admitted in Bombay high court. The basic contention is that FBT should be levied on ‘collective’ benefits enjoyed by employees without extending its scope to business expenditure like endorsements of brands by celebrities and distribution of free samples. The argument is that it is not a tax on the income of either the employer or the employee. Advertising spends or work related hotel expenses fall within the purview of the genuine business expenses of an employer and hence should not be subject to FBT. FBT is also in conflict with taxes in state list.

The growth of the shipping sector is mellowed by levy of 12 different taxes following which. Indian shipping companies’ share in the seaborne export-import trade has reduced to 15 per cent from 40 per cent in the late 80s. The country is largely dependent on foreign ships to sustain its exim trade which results in an outflow of foreign exchange. According to an estimate, Indian companies lose over 5 per cent  of their net profit on account of these taxes. The 12 taxes include 33.66 per cent corporate tax on other income, 8.97 per cent minimum alternative tax on profit on sale of vessels, 14.03 per cent tax on dividends, 33.66 per cent fringe benefit tax, withholding tax varying between 11.22 per cent to 22.44 per cent on interest paid to foreign lenders external commercial borrowings, 10.2 per cent service tax, 12.5 per cent sales tax or value added tax on ship supplies and  spares, 3.12 per cent lease tax on charter hire, 3 per cent withholding tax on charter hire payments to foreign shipowners, tax on seafarers’ salary, wealth tax and customs duty. Together these taxes will generate  around Rs 300 crore of revenue for the government in 2005-06.

 Pre-Budget Expectations

The government may cut excise duty on electronics hardware by 4 per cent in the forthcoming budget. Currently, all electronics hardware products excluding personal computers, set top boxes and mobile phones in the 16 per cent excise duty market, which is expected to be brought down to 12 per cent.

The Confederation of Indian Textile industry (Citi) has in its pre-budget memorandum, has insisted halving the excise duty on all man-made fibres (MMF) to 8 per cent. Citi, which represents all major segments of the textile industry, said that levy of 16 per cent excise duty on MMF and 8 per cent duty on spun yarn had resulted in accumulation of huge unutilized Cenvat credit with spinners. The confederation also sought removal of customs duty on MMF in order to help the MMF-based textile industry increase its share in the domestic market and to tap high potential export markets. Currently, MMF imports are subject to customs duty at peak rate of 15 per cent.

The committee convened to chart out a roadmap for transition to the exempt-exempt tax (EET) method for a host of designated savings schemes has recommended removing home loans and tuition fees from Section 80 C of the Income Tax Act 1961. Only pure financial savings instruments like PPF, LIC Policies, Government of India bonds and pension policies will qualify for tax deduction under 80 C. Investors, who claim tax deduction on these instruments, will have to pay tax at the time of withdrawal. The panel has proposed a tax on withdrawals only for investors who claim a tax deduction  up to Rs 1 lakh on designated savings instruments under 80 C. However, for the first time, investors will have the flexibility of switching their investments  from one savings instrument to another within the basket. No tax will be levied, while rotating between savings instruments.   

FINANCIAL  MARKET

Capital Markets

Primary Market

The QIB portion of the initial public offer (IPO) of Repro India Ltd., which closed on December 1, 2005 has been oversubscribed by nearly 7 times with bids received for 90.5 lakh shares as against 13.1 lakh shares on offer in the price band of Rs.145 to Rs.165. The non-institutional investors (NII) and retail categories have been oversubscribed by 13.5 times and 7.5 times, respectively. 

The QIB portion of the IPO of Kernex Microsystems (I) Ltd., which opened on November 28, 2005, has been oversubscribed by nearly 10 times till December 2, 2005 with bids received for 2.1 crore shares as against 22 lakh shares on offer in the category in the price band of Rs.225 to Rs.250. The retail segment has received bids for 45.2 lakh shares till December 2, 2005. The IPO closes on December 3, 2005.

The follow-on public offer of ICICI Bank, which opened on December1, 2005 witnessed the QIB portion being oversubscribed by 2.8 times till the second day with bids received for 13.2 crore shares as against 4.7 crores shares on offer in the category in the price band of Rs.505 to Rs.545. None of the other categories have been oversubscribed till December 2, 2005. The IPO closes on December 6, 2005.

Secondary Market

The Sensex has created history by achieving the milestone of 9000 points. The Sensex’s total market capitalization has grown by Rs.1,10,469 crore (10.8 per cent) to Rs.11,31,855 crore as on November 28, 2005 from Rs.10,21,386 crore on September 8, 2005. It was also an all-time high for Nifty and CNX Midcap Index. Buying was seen across the board. The broader 50-share S&P CNX Nifty also closed at a new all time level. The index gained 1.06 per cent or 28.85 points to close at 2,712.            

Government Securities Market

Primary Market

The RBI has announced sale (re-issue) of 8.07 per cent 2017 and 7.40 per cent 2035 for notified amounts of Rs 5,000 crore and Rs 3,000 crore, respectively on December 6.

The RBI has fixed the rate of interest on the floating arte bond 2009 at 5.81 per cent applicable for half year (December 6, 2005 to June 5, 2006).

The yields set at the 91-day treasury bills auctioned during the week under review has remained steady at 5.74 per cent as in the previous week.

Secondary Market

The weighted average YTM of 8.07 per cent 2017 rose to 7.22 per cent on December 2 from 7.18 per cent on November 25.

Foreign Exchange Market

The six-month forward premia rose from 0.63 per cent on November 25 to 0.80 per cent on December 2.

INSURANCE

The Life Insurance Council, the representative body for Indian life insurance companies, along with Actuarial Society of India (ASI), has floated a new company called Mortality and Morbidity Investigation Bureau (MMIB), a 50:50 joint venture between the Council and ASI. MMIB has been mandated with preparing a new mortality chart on the basis of which life insurers will fix the premium for insurance policies. With the increase in life expectancy, there is a need to upgrade the mortality table to current levels. A new chart will result in a more realistic premium calculation for new policies. At present, new private life insurers base their calculations on the decade-old mortality table prepared by LIC. In addition, the company will also prepare a morbidity table — a set of figures which will indicate incidence and severity of sicknesses and accidents in a defined classes or persons. At present there is no morbidity table, such a table will enable correct pricing by insurers for all new products. Currently, Indian insurers draw examples from the international experience of reinsurance firms on critical illness. At a later stage, MMIB will provide consultancy and data service to insurers for a fee. It will initially work in technical collaboration with the Continuous Mortality Investigation Bureau (CMIB) of the UK .

The Ministry of Health and Family Welfare is considering establishing a task force to develop a low-cost health insurance programme as part of the National Rural Health Mission. As per the proposal, over 3,200 community health centres in the country will be strengthened so that they can provide basic healthcare to the masses. The strengthening of the public health delivery system and the availability of a large number of health workers will provide an opportunity to improve risk pooling through the community-based health insurance, it is expected. It is estimated that household expenditure on healthcare during 2004-05 amounted to more than Rs.1,00,000 crore.

CORPORATE SECTOR

General Motors India has reduced prices of spare parts of Chevrolet Optra and Tavera ranging from 26 per cent to 52 per cent.

Kanishk Steel industries has acquired a 1.5 lakh tonne steel re-rolling plant from Lamifer of Italy at the cost of Rs 16 crore. The company plans to relocate the eight year old plant to India and set up in Mailaduthurai in Tamil Nadu by October 2006.

The Nepal-based Chaudhary Group makers of Wai Wai noodles, is setting up two manufacturing plants in Sikkim and Udhampur in India with an investment of over Rs 50 crore. The Sikkim plant will start production in February 2006. The Udhampur plant would be set up in 2006.

Vardhman Polytex, the Oswa group flagship, has announced a joint venture with Austria-based FM Hammerle to set up Rs 200 crore yarn dyed shirting fabric factory.

Engineering and construction major, Larsen and Toubro (L&T), has received     Rs 1000 crore turnkey project by oil behemoth ONGC. L&T has also received an additional order of Rs 263 crore fro construction of a passenger terminal building at the proposed Hyderabad International Airport .

Visakha Cooprative Dairy has received Rs 3 crore order from Mother Dairy for supply of butter. During 2004-05 the butter production at Visakha Dairy has increased to 10 tonne from 8 tonne in the previous year.

Sona Koyo Steering Systems Limited has received an order from General Motors India to supply 50,000 electronic power steering systems to a new GM model.

IVRCL Infrastructure and Projects has received orders worth Rs 199 crore for various infrastructure projects. The order includes Rs 51.2 crore order from Rail Vikas Nigam, Mumbai, for supply of installation of roadbed facilities, bridges, track signalling and general electric works in connection with the doubling of the Mohol-Solapur BG line on Chennai-Mumbai route.

SKumars Nationwide Limited has set up a wholly-owned subsidiary, Brand House Limited (BHL).

Maruti Udyog Limited has reported a 6 per cent jump in domestic sales in November 2005 to 43,568 vehicles from 40,948 vehicles in November 2004.

Siemens Limited India and Siemens AG, Germany have signed two contracts worth Rs 2600 crore with Qatar General Electricity and Water Corporation for the development of the power transmission network in Qatar .

LABOUR

The Pension Fund Regulatory Development Authority (PFRDA) is considering a minimum capital of Rs. 25 to 75 crore for pension fund managers, considerably lower than that pegged for insurers at Rs. 100 crore. The Chairman of PFRDA has stated that it could be fixed either at Rs 25 crore of Rs 50 crore or Rs 75 crore. The regulator is yet to decide on the number of pension fund managers, but there could be at least two public fund managers like Life Insurance Corporation (LIC) and State bank of India (SBI) entering the pension area. Other major players, which might act as pension fund managers are PNB Principal, ICICI Prudential, Aviva, ING, HSBC, Birla Sunlife and HDFC Standard Life. Foreign financial giants like Merrill Lynch and Templeton, which have mutual fund arms in India may also join the pension sector. The New Pension Scheme (NPS) is expected to be operational by October 2006 and these players are watching the developments in the pension sector from time to time.

The chairman of the Pension Fund Regulatory Development Authority (PFRDA) has given certain guidelines about the New Pension System (NPS) to be operational   by October 1, 2006. According to him, there would be no guarantee of a minimum returns on pension funds, but a guarantee can be offered by pension funds managers, if the subscribers opt to pay for it. He added that the final draft on regulatory affairs would be put up after the Bill is passed in parliament. He also said that there would be a pension advisory committee to work out the finer regulatory points, as directed by the standing committee on finance.

Amid pressures from trade unions, the politically sensitive decision on Employees’ Provident Fund Organisation’s (EPFO) interest rate to its subscribers has been continuously postponed. Most of the regional Provident Funds (PFs) are withholding the interest amount, which is due since April this year. The due interest amount to the retired employees since April this year will be given only after the government decides on a final rate. Most of the funds have taken up the view that if the interest is paid at the current rate of 9.5 per cent and the Employees’ Provident Fund Organisation (EPFO) approves a lower rate for 2005-06, it will be difficult to recover the excess amount from the employees who have left the organisation. The trustees of few exempted funds have fixed an interest of 8.5 per cent, a rate they feel the government will eventually clear. In principle, the PF’s are suppose to stick to the existing rate of interest rate of 9.5 per cent.

EXTERNAL SECTOR

The government has rejected three high-profile foreign investment proposals: Cargill’s proposal to get into commodity exchange brokerage; Universal Leaf Tobacco Company’s bid to enter tobacco trading and Chrys Capital’s plan to pick up a 12.89 per cent stake in Development Credit Bank. All the proposals have been turned down by the government for different reasons. The three proposals together entailed an investment of about Rs 250 crore.

Gitanjali group is targeting a turnover of Rs 5000 crore for its gems and jewellery special economic zone in Andhra Pradesh by 2009.

According to commerce secretary, the rules for the new special economic zone policy will be notified in two weeks.

Nokia India Private Limited, the wholly-owned subsidiary of Nokia, has warned that its investments in India could be affected due to a delay by the government in notifying customs duty benefits for a special economic zone being set up by the company at Sriperumbudur in Tamil Nadu. The revenue department is yet to notify the benefits for the SEZ, which will enable Nokia to import components free of duty.

In a bid to provide supplementary services to its existing clientele of small and medium enterprises (SMEs), state owned Export Import Bank of India (Exim) has rolled out consultancy services to help the Indian exporters to tap business opportunities in the overseas market.

China ’s textile export volume is expected to hit a record $116 billion in 2005 despite increasing trade disputes. This year’s export figures would represent a 19.2 jump from previous years export volume, which stood at $97.3 billion.

A strategic shift to produce more value-added technical textiles would help India to raise its textile exports manifold as also a higher investment. The participants of Asian Textile Conference raised these sentiments.

The government is considering allowing duty-free import of polished diamonds. At present, polished diamonds attract 5 per cent customs duty, while the import of rough diamond is allowed duty-free.

In a move to provide much required impetus to the textile machinery industry, the textile ministry has proposed that the heavy industry ministry formulate scheme to make available low cost finance to the industry. According to textile ministry, the proposed scheme could be on the lines of the Technology Upgradation Fund Scheme (Tufs) for the textile industry. It could be specifically designed to encourage entry of more players into the textile machinery manufacturing sector. Currently, the textile industry suffers from a dearth of domestic machinery manufacturers, forcing the industry to depend on imports, mainly from European countries like Germany and Italy . To facilitate setting up of new capacities in the machinery industry, the government had liberalised imports through duty cuts and removal on restrictions on second-hand machines.

INFORMATION  TECHNOLOGY

The world’s second largest chip maker AMD, along with the government and SemIndia, a newly-formed consortium of NRI entrepreneurs has signed a memorandum of understanding to invest $3 billion in India ’s first chip fabrication plant in the next 2-3 years. AMD will be the technology supplier for the facility and may pick up a stake in SemIndia. The SemIndia fab plant will employ 2,000 people and will be part of an ambitious Fab City with units for electronics, PC and mobile phone manufacturing. The location of the Fab City is yet to be decided. The $220 billion global chip market is dominated by Intel with an 80 per cent share followed by AMD’s 20 per cent.

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

LIST OF WEEKLY THEMES

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