Current Economic Statistics and Review For the Week 
Ended January 7, 2006 (1^st Weekly Report of 2006)

I

Theme of the week:

The Current Economic Situation

An Overview

1.   Re-orientation in economic perspectives

            As yet another momentous Gregorian year has come to an end, the perspectives on the Indian economic performance have moved from the rhetorics of ‘India Shining’ to, the more sober stance of ‘ India on the move’.  What has changed in perspectives has been more fundamental; it is that the debate on growth should not just concentrate on the single and bland GDP number; it has to consider structural issues, issues of differences in sectoral growth, and also the questions of poverty, unemployment and inequality.  This preference more broad-based growth pattern and for better governance are reflected in the passing of two major progressive legislations, namely, the National Rural Employment Guarantee Act and the Right to Information Act.  The re-orientation of the development process  in favour of the rural sector generally and agriculture  in particular, preparation of a road map for agricultural diversification and even canvassing of proposals for a second green revolution in agriculture, and more intensive promotion of small and medium-scale enterprises, have constituted important aspects of new thinking in economic management.  Likewise, the pressure brought to bear on banks and the financial system to render substantially improved credit delivery for agriculture and SMEs as well as the institution of an ambitious Bharat Nirman project aimed at strengthening the country’s rural infrastructure including water supply, power, housing and roads, constitute the other important elements in this new thinking.  And, finally, this period has seen the release by the Planning Commission its Mid-Term Appraisal  of the Tenth Five Year Plan (2002-03 to 2006-07), which has frontloaded, as a medium-term  objective, of focusing on the rapid growth of physical infrastructures like the railways, roads and highways, shipping, civil aviation and telecommunications.  For this purpose, an institutional framework  for investment has been put in place, which encompasses a special purpose vehicle (SPV), a viability gap funding programme, a special approval procedure for public-private partnership projects and a model concession agreement.  All of these put together have generated an environment of economic optimism on the eve of the new year.

2.      Growth scenario

            The year that has passed by, has seen a steady but gradual upward revision of the real GDP growth scenario.  In the initial period of 2005-06, there were fears that following a tardy monsoon, agriculture growth would suffer a setback and hence the overall GDP growth was moderately poised.  Prior to the south-west monsoon period, the RBI had expected a 7 per cent growth for 2005-06 with a 3 per cent growth in agriculture, but the Prime Minister’s Economic Advisory Council (Chairman: Dr. C. Rangarajan) had warned the government in early July 2005 that the economy could see a low growth rate of 6.7 per cent in 2005-06 after attaining 6.9 per cent in 2004-05 and 8.5 per cent in 2003-04.  The Council had expected a 1.8 per cent growth in agriculture and 7.0 per cent in manufacturing.  By the time the kharif season came to an end, the country had received better rainfall and therefore, all authorities and agencies have pushed up their growth forecasts.  The RBI revised its growth projections upward from 6.5 per cent to 7.0 per cent to 7.0 to 7.5 per cent.  The Union Finance Minister, who has been more cautious in this respect, placed the projection of GDP at 7.0 per cent for 2005-06, his source of caution arising from the continued disappointing performance of infrastructure sectors like coal, petroleum and power.  In the short-term context, our own projections have suggested a growth of about 7.5 per cent for the current year.

3.      Caveats in the growth scenario

            Though the current scenario is one of buoyant macro-economic performance, there are a number of caveats that need to be recognised, which would have both constrained the growth occurring so far and which would similarly hold back the prospects of growth in the medium-term.  First and the foremost is the persistence of sluggish growth in the infrastructure areas like coal, power and petroleum.  A silver lining in this respect is the sizeable amount of investment planned and under implementation in these infrastructure areas.  As per CMIE’s CapEx (capital expenditure) data, the highest proportion of investment under implementation – about one-fourth or Rs 219,382 crore out of Rs 849.503 crore (24.5 per cent of GDP) as in October 2005 – is in power generation, much above the one-fifth proportion for the manufacturing sector.  No doubt, when investment does get accelerated in infrastructure areas, it would have a beneficial effect on the manufacturing sector because of increased demand. The second worry concerns the sluggish nature of the rate of aggregate investment in the economy.  The CSO data available up to 2003-04 suggest that while the unadjusted gross investment rate has stagnated at around 23 per cent of GDP during the past two years, the adjusted capital formation rate has risen from 23 per cent during 2001-02 to 25 per cent during 2002-03 and to 26 per cent in 2003-04.  Even this, however, has been in the form of some regaining of the lost ground after attaining over 25 per cent investment rate in 1999-2000.  The original tenth five year plan had anticipated a steady increase in the investment rate from 24.5 per cent in 2002-03 to 32.3 per cent  in 2006-07, which was to be consistent with an average 8 per cent GDP growth per annum.  Now, the Mid-Term Appraisal of the Plan has reduced these projections to 28.6 per cent by the terminal year of the plan (2006-07) and simultaneously reduced the average growth target from 8 per cent to 7 per cent per annum during the plan period.  Thirdly, the buoyant growth seen so far is to a sizeable extent attributable to the services sector which is now growing at a double-digit annual rate.  On the other hand, amongst the real sectors, agriculture’s trend rate of growth has remained at around 2.5 per cent and that of the manufacturing sector at about 7.0 per cent.  It is widely recognised that an aggregate GDP growth of 8 per cent can only be consistent with a growth of 4 per cent in agriculture and 10 per cent in the manufacturing sector.  The relatively weak performances of these sectors are essentially due to inadequate investment in both the sectors.  As per CMIE’s CapEX data referred to above, investment proposals for the manufacturing sector were to expand from 18.8 per cent of the aggregate investment in April 2004 to 31.0 per cent in October 2005, but in terms of actual investment under implementation, the share of the manufacturing sector has only risen from 16.6 per cent to 20.0 per cent, thus showing that a sizeable numbers of investment proposals in the sector are not taking off the ground. Finally, the inadequacy of domestic invisible funds is not being met by any significant amount of foreign direct investment.  Instead,  large proportions of foreign capital inflows have been in the form of portfolio investments in the equity market in India , which have their own limitations in supporting domestic investment.  

4.  Other elements of the macro-economic scene

            The caveats cited above have their relevance for the growth prospects in the medium-term.  There are a number of other elements in the current macro-economic scene which present a favourable picture of the current economic performance and which also augur well for the growth prospects in the near future.

            The first, and a remarkable, aspect of the recent macro-economic performance has been the rapid achievement in fiscal consolidation.  The combined revenue deficit of the centre and states is expected to dwindle from 6.6 percent in 2002-03 to 3.4 per cent in 2005-06 (BE) (Table 1).  While the trends in state finances in the current year are not known, there are indications of further improvement in central finances this year so far.  For the states too, with the implementation of VAT by all states except a few, tax receipts seem to be showing buoyancy.

            The second positive element in the macro-economic scene has been the sudden change in the attitudes of banks towards credit delivery.  For quite some period, scheduled commercial banks have exhibited shyness in advancing non-food credit, but this tendency has got changed in 2004-05 when there was a 26.7 per cent rise in total bank assistance rendered by them to the commercial sector as against 16.7 per cent in 2003-04.  In the current year so far during April-December 9, 2005, the expansion in non-food credit assistance has accelerated to 18.9 per cent from 16.3 per cent in the corresponding period of the previous year.

            Thirdly, as per data compiled by CMIE the total of resources mobilised by the corporate sector in the domestic primary market has increased from Rs 53,801 crore in 2003-04 to Rs 60,618 crore in 2004-05 (both April-March); it has further increased from Rs 34,032 crore during April-November 2004 to Rs 40,802 crore during April-November 2005 – a rise of 20 per cent.

            Fourth, the external sector has been a source of significant support for the domestic economy.  This began a few years ago in 2002-03, when export-import trade began to accelerate and foreign currency assets began to bulge.  For three years 2002-03 to 2004-05, export growth in US dollar terms has been in the range of 20-24 per cent and import growth in the range of 19-34 per cent.  As a result of more rapid growth of imports, the merchandise deficit as per DGCI & S has galloped from $ 8,693 million in 2002-03 to $27,819 million.  Even so, as a result of sizeable increases in net invisible receipts from $17,035 million in 2002-03 to $ 31,699 million in 2004-05, the current account balance has remained in surplus in the first two years (in fact, for three years from 2001-02) and experienced a meagre deficit of $6,431 million in 2004-05.  The period has seen many other dynamic elements in the country’s external sector: significant diversification in the country’s export-import trade, emergence of software exports as a major component of India ’s service exports, with total software exports achieving a quantum leap from $6.2 billion in 2000-01 to $17.2 billion in 2004-05.  A disappointing performance on the external sector front has been the persistently sluggish foreign direct investment at about $ 3 billion per year.  Also, the current year so far has faced a series of apparently temporary setback in the external sector.  During April-November 2005, export growth has stumbled to 16.1 per cent from 31.4 per cent during April-November 2004, but the decline in non-POL imports has been less dramatic, from 31.9 per cent to 23.4 per cent, thus widening the trade deficit from $16.34 billion to $ 27.64 billion.  Increase in foreign currency assets has also been meagre this year so far: $2.63 billion as against $17.60 billion.

            Finally, a noteworthy aspect of the macroeconomic scene in the recent period has been the generally low-level of inflation rate.  As per the wholesale prices index,  the annual inflation rate (on weekly average basis), which was 7.2 per cent in 2000-01, ranged between 3.4 per cent and 5.4 per cent during the subsequent three-year period 2001-02 to 2003-04, but it jumped to 6.5 per cent in 2004-05 following some seasonal pressures on commodity prices.  During the current fiscal year so far, there has occurred a steady decline in the rate of WPI increases such that the average increase during April-December 17, 2005 works out to 4.5 per cent as against 6.9 per cent in the comparable period of the previous year.  The inflation rate as revealed by the CPI for industrial workers (CPI-IW), as also for urban non-manual employees and agricultural labourers, has remained moderate - generally below 5 per cent on year-on-year basis for six years 1999-2000 to 2004-05 as a result of better supplies of wage goods and infrequent increases in petroleum product prices. The current year 2005-06 so far has seen acceleration in the rates of increases of all the three consumer price indices, that is, by more than 5 per cent each as compared with 4.0 per cent or less in the corresponding period of the previous year.  Data on CPI of major groups of commodities under CPI-IW suggest that apart from higher increases in food prices, the rate of increase has been the highest in the cost of housing for the industrial workers in the first half of the current year.

Highlights of  Current Economic Scene

AGRICULTURE     

The central government has refused to implement the proposal to introduce a scheme for providing fertiliser subsidy in cash directly to farmers, on the ground of technical non-viability. The panel, headed by Y K Alagh, had proposed this new scheme to be carried out on the experimental basis in 3 districts. Fertiliser Association of India has also doubted the outcome of the new scheme pointing out the difficulties involved in implementation like huge volumes of clerical work required to distribute the subsidy in cash on individual basis and the scope for unfair practices and corruption.

The Union Agriculture Ministry has sanctioned around Rs 2.80 crore for the state agriculture universities to grow jatropha, in order to extract bio-diesel from the seeds in the coming years. Anand Agriculture University will receive Rs 2 crore and Junagadh Agriculture University will get around Rs 80 lakh for the jatropha plantation. Recently Planning Commission has set up National Mission Programme under which jatropha will be grown in targeted area of 32 lakh hectares across the country. Gujarat is likely to contribute more than 10 lakh hectares of farm towards the target. Jatropha can yield up to 2 tonnes of bio-diesel fuel per year per hectare.

The government has ruled out the creation of any separate sugar buffer stock and is relying on the four million tonne stock at the disposal of sugar mills, which can be utilized as a buffer to meet any contingency arising out of increase in domestic demand or rise in price, and external trade requirements in the current sugar crop year 2005-06. Total carry-forward stock for October-September (2005-06) sugar year would be 6.2 million tonne, which includes 1.25 million tonne unprocessed raw sugar imported under advance licensing scheme during the previous sugar season.

Agricultural and Processed Food Products Export Development Authority (Apeda) is planning to set up Special Agricultural Export Processing Zone (SAEPZ) for poultry, at Namakkal in Tamil Nadu. According to All India Poultry Products Exporters Association (AIPPEA), the SAEPZ grade would enable the poultry sector to obtain international standard cold storage, egg washing and grading facilities. As India is free from bird flu epidemic, several other Asian countries are willing to import chicken, meat and eggs from India . Setting up SAEPZ will certainly help India to reap the benefits of this situation in boosting exports of poultry sector, which is currently less than 1 per cent of the world poultry export.

The Union Agriculture Ministry has put forth the proposal to make National Agriculture Co-operative Marketing Federation (Nafed) as the single channel agency for controlling onion prices thereby controlling onion exports in case of over supply. Nafed has also urged the agriculture ministry to give local transport subsidy for intra-country transportation of onion.

INDUSTRY

Pharmaceuticals

The National Pharmaceutical Pricing Authority (NPPA) has revised prices of some bulk drugs and formulations – it has reduced the price of Sodium Penicillin G by 32 per cent, Procaine Penicillin by 28.5 per cent and Benzathine Penicillin G by 17 per cent, Pheniramine Maleate by 3.7 per cent, Trimethoprim by 20 per cent and Rifampicin by 2.3 per cent.

As part of a draft National Pharmaceutical Policy for 2006, the government will set ceilings on trade margins, migrate to a uniform maximum retail price regime, do away with branded generics and reduce excise duty on all pharma products by half to 8 per cent.

INFRASTRUCTURE

Overall

A sharp decline in the growth of five out of six core sector industries, particularly crude oil and finished steel, have pulled down overall infrastructure sector growth to 3 per cent in November 2005 as compared to 5.7 per cent in the same month last year.

The cumulative growth of the six core sector industries during April-November 2005 has declined to 4.4 per cent compared to 6.7 per cent during the same period of the last fiscal year.

Power

The Central Electricity Authority has estimated an energy shortfall of 11.3 per cent (81358 million units) during 2006-07 as compared to the 7-9 per cent during the current fiscal year. It also estimates a peaking shortfall of 16 per cent (over around 19000 megawatt) in the coming fiscal year as compared to 10-12 per cent in 2005-06.

The West Bengal State Electricity Board is heading for a commercial profit in the current fiscal, the first ever by any SEB in the country. The official declined to disclose figures though declared that there would be a marginal profit. The revenues have buoyed mainly due to sale of power to rising consumer base, increased sale to traders and incentives from the union government under the accelerated power development and reforms programme.

Transport

The government is planning to set up a SPV for funding rail and road connectivity between Pardip port and Haridaspur in Orissa, with the help of Rail Vikas Nigam Limited, National Highways Authority of India and some major private mines. The main reason behind setting up the SPV is for facilitating early completion of the 77 km stretch, which is a part of NHAI’s port connectivity project. The four laning of the route would facilitate smooth movement of coking coal to steel industries close to Pradip. 

INFLATION

The annual point-to-point inflation rate based on wholesale price index has gone up to 4.62 per cent during the week ended December 17, 2005 from 4.50 per cent registered during the previous week. The inflation rate was higher at 6.44 per cent in the corresponding week last year.

The WPI in the week under review has declined by 0.2 per cent to 197.1 from the previous week’s level of 197.4 (Base: 1993-94=100). The index of primary articles’ group (weight 22.02 per cent) has declined considerably by 0.4 per cent to 195.1 from the previous week’s level of 195.8, due to a considerable decline in the price indices of food articles group. The index of food articles declined by 0.7 per cent to 197.7 from 199.1 in the last week, mainly due to lower prices of urad, condiments and spices and fruits and vegetables. The index of ‘fuel, power, light and lubricants’ group (weight 14.23 per cent) has risen marginally by 0.1 per cent to 311.1 from the previous weeks level of 310.7, due to the higher prices of bitumen, furnace oil and naphtha. The index of ‘manufactured products’ group constituting the maximum of 63.7 per cent of total weight, has declined by 0.2 per cent to 172.4 from the previous week’s level of 172.7, mainly due to lower prices of food products and machinery.

The latest final index of WPI for the week ended October 22, 2005 has been revised; as a result both, the absolute index and the implied inflation rate remained unaltered at their provisional week’s level of 197.7 and 4.49 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 and up to mid-December. 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 State Bank of Saurashtra has completed implementation of core banking in all 424 branches and became the third public sector bank to achieve the system of hi-tech banking as well it is the first public sector bank in the country having all its branches facilitated with Real Time Gross Settlement (RTGS) system.

Private sector bank, ICICI Bank has offloaded its 4.81 per cent stake (aggregating to 31.5 lakh shares) by selling the shares of Federal Bank in favour of foreign institutional investors (FIIs) Goldman Sachs and Kuroto Fund. Goldman Sachs has bought 20,00,000 shares at Rs.170.25, while Kuroto fund purchased 9,80,000 shares at Rs.175.90. The remaining shares were sold to the retail investors in small lots at market prices. As a result, ICICI Bank’s shareholding has plummeted to 15.95 per cent from the earlier stake of 20.7 per cent. The sale of shares in Federal Bank is to comply with the RBI’ s guidelines that no single bank can hold more than 5 per cent stake in the paid-up capital of a private sector bank. ICICI bank also holds around 11 per cent stake in the South Indian Bank and is seeking opportunity to offload its stake in the bank.

PUBLIC FINANCE

Planning Commission is demanding huge resources in 2006-07 to fulfill social and developmental commitments of the government. It is demanding to increase gross budgetary support  for the central sector in 2006-07 by over 39 per cent at around Rs 1,53,000 crore. The finance ministry is however, confined  at a 23 per cent increase at around Rs 1,34,000 crore. If the demand of commission is not accepted , it would request central ministries to reconsider their proposed annual plans and downwardly revise them to match them with available resources. One of the reasons for shortage of resources is attributed to new developmental programmes announced by the UPA government,  which was over and above what was already committed in the Tenth Five Year Plan. 

With the inception of exempt-exempt tax regime (EET), the retirement savings instruments such as pension funds, provident funds and superannuation funds, life insurance policies and long term time deposits are expected to attract tax on withdrawal. Short and medium term savings instruments such as national savings certificates and infrastructure bonds are expected to be outside the EET purview. Exemption of Rs 1 lakh is allowed under section 80 C of the Income Tax Act, 1961 for investment in retirement planning schemes. Other than this exemption, a specific cap for investment in retirement planning schemes is being considered. Alternatively, a cap within the overall ceiling for deduction of Rs 1 lakh from taxable income may be considered. The finance ministry is considering various options to keep the taxation impact on withdrawals at the minimum. 

The finance ministry is likely to invite industry heads, agriculturists and economists for the annual pre-budget consultations in the second week of January. The finance ministry had discontinued the practice for a year, during the tenure of former finance minister Shri  Jaswant Singh.   But the present finance minister has revived it.

Backed by strong economic growth, the government is expected to collect about Rs 21,000 crore as service tax in the current financial year, crossing the target of Rs 17,500 crore by a wide margin. The potential for growth in revenues from services is high as this sector has 52 per cent share in India ’s gross domestic product (GDP). The collections from service tax in the financial year 2004-05 were about Rs  14,196 crore. At present, only 81 services are under the tax net. Mumbai, where the All India Directorate for service tax was located, contributed about 26 per cent of the total service tax collection.

Instead of taking the disinvestment route to raise  resources, the Left parties would like the government to restore the tax-GDP ratio to the pre-economic reforms phase. This was among the host of suggestions made under the Left Parties’ alternative resource mobilization plan. According to CPI(M) Politburo member Shri Sitaram Yechury, the tax GDP ratio has come down from  11 to 8 per cent. “One percentage point of GDP translated into Rs 40,000 crore. Three percentage points will mean over Rs 1 lakh crore. Shri Yechury told”.

More SEZs in the state has increased the concern of the Gujarat state government about its effect on state revenue collection. Earlier this month, the centre cleared nine SEZs  in Gujarat in addition to the two in Kandla and Surat which have been already approved. Two more proposals, one in Dholera and other in Hazira are lying with the Gujarat government clearance.  Thus, there the total of SEZs in the state comes up to 13. The regular sale from these deemed foreign territories to Gujarat will result in huge losses to the sales taxes. The sales tax department has already communicated  to the finance department about the implications that too many SEZs may have on the tax collections. Any sales from SEZ to domestic tariff area (DTA) will be treated as import and import duty will be applicable as per the central government policy. Sales tax will be applicable to SEZ goods as applicable to other imported goods. If the sales are not integrated with DTA properly, it can spell huge losses to the state government.

The revenue department is of the view that increased export orientation of the manufacturing sector is having an adverse impact on its excise duty collection efforts. The finance ministry said that when exports take place the finance ministry not only foregoes excise duty collection on such goods, the tax suffered on inputs that go into the manufactured export  product has to be refunded by the government. The government’s budget estimate for excise duty collection is at Rs 1,18,268 crore which is about 19.9 per cent increase over the 2004-05 actuals.   

The chemicals ministry has  proposed a 2 per cent cess on all central taxes to raise funds to subsidise healthcare for the poor and to give subsidized medicines to all cancer and HIV/AIDS patient in the country. As per the draft of the pharmaceutical policy 2005, the ministry plans to raise Rs 6,500 crore with the proposed cess to fund  a series of welfare measures for the poor. On the other hand, it proposes  series of tax breaks for drug makers in addition to an excise duty cut on medicines. Slashing the 16 per cent excise duty on medicines by half of what was proposed, will cost the government Rs 1,000 crore a year. The Rs 5,500 crore revenue-a-year thus generated, will also be used to set up pharmaceutical parks and support drug research. The ministry has sought comments  from all other ministries and expects to finalise  the policy  by the end of the February 2006. The ministry plans to provide incentives for research by drug makers who meet certain parameters.

Finance Minister said that he did not favour blunt measures such as search and seizure, but would rather prefer voluntary disclosure by assesses. Accordingly, large tax payer unit (LTU) would be set from early 2006-07 in Delhi , Mumbai, Banaglore, Chennai and Kolkata. The finance ministry has sent out letters to 582 companies in these cities inviting them to join the LTU. In the initial years of the roll out of the LTUs, large assessees will have the option to file all their tax returns at the LTU or continue with current practice of filing  returns  for income tax, excise and service tax with different commissionerate. But in a year or two, filing of returns at the LTU will be made mandatory for all entities that crossed a prescribed threshold. In the first phase of 2006-07, business entities which paid excise duty upwards of Rs 5 crore in 2004-05 and are assessed of income tax in these five cities could file their returns at the LTU. Also, it would be extended to other large cities such as Ahmedabad and Pune.

The centre is planning to allow states to levy Value Added Tax (VAT) on tobacco products from 2006. Tobacco products, along with sugar and textiles, now attract a central levy of 4 per cent additional excise duty (AED), instead of local sales tax besides central excise duty. But, once the centre allows states to levy VAT on these items, the AED will be removed. The total incidence of tax on cigarettes would be higher when the rate applied is 12.5 per cent instead of 4 per cent. States have long been demanding that the powers to tax the three AED items should be transferred to them and so has the Twelfth Finance Commission. The centre collects close to Rs 3,000 crore annually as AED on the three items. The tobacco industry and cigarette-makers are already one of the highest taxed sections of the business.

The government has decided more benevolent approach while considering philanthropy. Donations made to approved entities such as educational institutions, programmes, projects or schemes will be eligible for deduction from income, even if the approval is withdrawn subsequently. The Union Cabinet cleared a finance ministry proposal to amend a clause of the Taxation Laws (Amendment) bill 2005 to protect donors in the event of withdrawal of  approval of the donee entities, programmes, projects or schemes. This amendment will be moved in the Lok Sabha when the bill is taken up for the discussion in the next session.

FINANCIAL  MARKET

Capital Markets

Primary Market

Gitanjali Gems Limited has filed the draft red herring prospectus with Sebi for IPO worth Rs. 1.7 crore equity shares of Rs. 10 each at a price to be determined through book-building process.

Secondary Market

The NSDL has strongly objected to the order passed by Sebi accusing it to be one of the parties responsible for the failure in regulating the Yes Bank IPO allotment. NSDL said that it is not responsible for the multiple benami account plan and it has also categorically said that the regulator has not followed principal of natural justice while passing the order. Moreover, it has also stated that it is not registered as a self-regulatory organisation with Sebi.

Sebi has given its signal to introduce Gold Exchange Traded Fund (GETF), resume Mapin registrations, and introduce optional grading of IPO of unlisted firms by credit rating agencies registered with Sebi. Further, regulator is also working on an integrated common platform for electronic filing and dissemination of corporate information. Also promoters will be allowed to raise their shareholdings beyond 55 per cent to 75 per cent through market purchases.

The hardening of interest rates, inflation pressures and high international crude oil prices has induced FIIs to divert investments in debt to global and domestic equity market. According to Sebi data, FIIs undertook net sales of Rs. 5,409.9 crore in debt market till December 27, against their net investments of Rs. 3,147.50 crore in the previous year.

The strong and positive trend witnessed in most of the leading Asian exchanges lifted the sentiments on the Indian bourses. The week saw the BSE closing the calendar year 2005 at 9397.39 level, a 1.52 per cent increase over its previous week’s closing value and BSE small-cap witnessed an 2.52 per cent gain over its previous week closing value. Among the sectoral indices, consumer durable registered the highest gain of 4.27 per cent followed by BSE Oil and Gas at 3.51 per cent.

Likewise, the NSE closed the year at 2836.55 levels, a 1.13 per cent increase over its previous week’s closing value. Meanwhile, S & P CNX 500 closed the week at 2459.2 levels, a gain of around 1.36 per cent over its previous week closing. Bank Nifty registered and 1.44 per cent increase as it closed at 4534.2 levels.

As of December 29, the FIIs have been net buyers to the extent of Rs. 9199.70 crore with purchases worth Rs. 31488.60 crore and sales of Rs. 22288.90 crore. However, mutual funds have been net sellers to the extent of Rs. 1799.61 crore with purchases worth Rs. 7430.02 crore and sales of Rs. 9229.63 crore till December 29.

Derivatives

BSE and NSE has informed that there would be a special trading session on January 18,2006 from 8am to 9am to facilitate the discovery of the post demerger price of Reliance Industries Ltd. (RIL).

The RBI in a press release has declared that the gross present value for any one per cent change (PV01) in the interest rate on non-option derivative contracts should be within 0.25 per cent of banks’ net worth, as on the last balance sheet date. The central bank has also said that the capital charge for market risk, for non-option derivative contracts, should be three times the PV01.

1.      Government Securities Market

Primary Market

RBI has set the rate of interest on the floating rate bonds (FRB’s) maturing in 2017 at 6.29 per cent, the rate of interest on the FRB 2017 was set at a mark-up over and above the variable base rate.

Under regular auction, RBI has mopped up Rs. 700 crore and Rs. 1109.23 crore though 91-day T-bills and 182-day T-bills, respectively. The cut-off yields for 91-day and 182-day T-bills were 6.1081 per cent and 6.1386 per cent, respectively.

The weighted average YTM of 8.07 per cent 2017 paper was 7.1985 per cent as compared to 7.2315 per cent in the previous week. Meanwhile, the 1-12 YTM spreads have increased by 1 basis points to 111 basis points.

Secondary Market

The call rates during the week have ranged between 6.32 per cent and 7.16 per cent, while repo rates have ranged between 5.90 per cent and 7.05 per cent. The daily average outstanding amounts in the LAF (reverse repo) operations conducted during the week were Rs. 1578 crore as against Rs. 25137 crore for the LAF (repo) auction.

Meanwhile, the RBI also released calendar of auction for LAF and Second LAF facility for the quarter January-March 2006.

The redemption of the State Bank of India Millennium Deposits was over smoothly as the RBI completed the sale of foreign exchange to SBI, a total amount equivalent to US$7.079.82 million was sold out of RBI’s foreign exchange reserves.

Bond Market

Bank of Rajasthan raised Rs. 70 crore through private placement of unsecured, non-convertible, redeemable, sub ordinate bonds, which were in nature of promissory note.

Indian Overseas Bank is planning to raise Rs. 250 crore via unsecured, redeemable, non-convertible, subordinate bonds in the nature of promissory note.

2.      Foreign Exchange Market

During the week under review, the rupee appreciated against the dollar as it closed at 45.07 as on December 30 after trading at 45.12 as on December 26.The six-month forward premia closed at 1.34 per cent as against 1.14 per cent last week.

3.      Commodities Futures Derivatives

Within a week of imposing additional margins of 4 per cent on its member trading in mentha oil and having open positions in their own accounts as well as their clients’ account; the MCX have decided to charge additional margin of 4 per cent on those members who have open positions, but this time it applies on both buy and sell sides, along with the daily margin of 8 per cent. As a result of these impositions, the total margin requirement for traders taking position in mentha oil has now reached 12 per cent on the short side and 17 per cent on the long side.

In a landmark move, the Forward Market Commission (FMC) has registered 2626 members trading on 21 commodity exchanges and has assigned Unique Member Code (UMC) to them. FMC reiterated its stand that no member will be allowed to trade beginning January 2006 with UMC. For improving the regulation at member level, FMC has directed all the exchanges to obtain UMCs for all their existing members, failing which the members would be debarred from trading in exchange from January 01,2006.

In another landmark move, the Cabinet gave its approval to the amendment of the Forward Contracts (Regulations) Act, 1952 and to introduce a Bill to this effect in Parliament following the recommendations of the Prime Minister’s Economic Advisory Council. Amendments to the contract will pave way for hedging against weather, introduction of options trading on commodities and the setting up of a Forward Market Appellate Tribunal on the lines of the Securities Appellate Tribunal set up under the Sebi Act. It will also pertain to enhancement of powers of FMC and corporatisation and demutualisation of the existing commodities exchanges and setting up of a separate Clearing Corporation, registration of intermediaries.

CREDIT RATING

Care has downgraded the earlier assigned rating for the Tier II subordinate bond issues aggregating to Rs.114.70 crores of The United Western Bank Ltd. (UWB) from ‘BB+’ to ‘B+’ The rating revision takes into account further decline in capital adequacy ratio of UWB much below the minimum regulatory requirement, as a result of losses suffered during half year ended September 30, 2005, continuing delay in infusion of Tier I capital and weak asset quality.

Icra has assigned an ‘A1+’ rating to the Rs. 7,500 million (enhanced from Rs.5, 000 million) short-term debt programme of Global Trade Finance Limited (GTF) [formerly known as Global Trade Finance Private Limited]. GTF has an outstanding rating of ‘LAA’ rating for its Rs. 250 million long-term debt programme. The ratings also take into account the company’s relatively short track record, low but improving profitability, adequate capitalisation and comfortable liquidity as well as the challenge it faces to continue to increase volumes in a competitive business environment while simultaneously maintaining asset quality and interest margins.

The agency has assigned a credit risk rating of ‘mfAAA’ to HDFC Cash Management Fund – Savings Plus Plan (HDFC-CMF-SPP). The rating indicates highest-credit-quality rating assigned by ICRA to debt funds. The rated debt fund carries the lowest credit risk, similar to that associated with long-term debt obligations rated in the highest-credit-quality category. The ratings should, however, not be construed as an indication of the prospective performance of the Mutual Fund scheme or of volatility in its returns.

In an another exercise, Icra has assigned an ‘A1’ rating to the Rs. 100 million Commercial Paper Programme of Ponni Sugar (Erode) Ltd. (PSEL), The rating action factors in the operational strengths of the company, its improving profitability and cash accruals following an upturn in sugar prices, its moderate debt levels and availability of adequate bank limits to fund the working capital intensive sugar operations

Icra has reaffirms ‘A1+’ rating assigned to Rs 2.5 billion commercial paper /short-term Debt programme of DCM Shriram Consolidated Limited (DSCL) and upgrades rating of its Rs. 100 million long-term debt programme to ‘LAA-‘ from ‘LA+’ .The rating upgrade has been driven by the improving business position of DSCL in two of its main business segments, Chlor alkali and Sugar, and the favourable outlook on these businesses in the medium terms, which is likely to result in a sharp growth in its profitability and cash accruals. The ratings continue to factor in the strengths derived from DSCL’s diversified revenue streams, its operating efficiencies for its PVC and chlor alkali businesses at Kota and its costs competitiveness in these businesses arising primarily out of a low-cost coal-based captive power generation facility

Icra has retained the ‘LA+ (SO)’ rating assigned to the Rs. 300 million bond programme of the Corporation of Madurai – Inner Ring Road project. The rating derives strength from the credit enhancement being provided through the escrow of toll collections from the vehicles plying on the Madurai Inner Ring Road (MIRR) and from a letter of comfort extended by the Government of Tamil Nadu (GoTN), promising to ensure adequate funds for debt servicing of the rated instrument.

CORPORATE SECTOR

Tata Technologies, a wholly-owned subsidiary of Tata Motors, has acquired Incat Technologies for Rs 425 crore.

Glenmark Pharmaceuticals has acquired a South African pharmaceutical company Bouwer Barlett Pty for an undisclosed amount.

Gujarat Heavy Chemicals Limited, India ’s largest soda ash maker, has acquired US textile company Dan River Incorporate for $ 17.5 million.

Nicholas Piramal India Limited has entered into a contract manufacturing agreement with Pfizer International LLC (Limited Liability Company) for veterinary related research and development services. The contract lasts for seven years.

NTPC has signed Memorandum of Understanding (MoU) with the Bihar Government and Bihar State Electricity Board (BSEB) for take over Muzaffarpur thermal power plant in Bihar . NTPC will acquire the plant through a new joint venture company. NTPC will retain 51 per cent shares in the joint venture, while BSEB will have the remaining 49 per cent.

PSL Limited, manufacturer of specialised pipes, has bagged a composite order over Rs 240 crore from Gas Authority of India Limited.

Cipla has signed a global supply deal with the German drug maker Boehringer Ingelheim. It involves development and supply of Boehringer’s hypertension drug, Telmisartan.

Larsen and Toubro has received an order by Gangavaram Port Limited to execute the first phase of the Deep water port project in Andhra Pradesh worth Rs 411 crore. The company will execute the order on engineering, procurement and construction basis within 2 years from December 2005.

Thermax Limited has signed a licensing agreement with the heavy Water Board, department of atomic energy, government of India , for their proprietary ammonia injection technology to control particulate emission in the flue gases from the company’s plants and power stations.

Mentor Graphics has inaugurated its new research and development facility at Noida. The company has invested approximately $ 2 million for the development of the research centre.

LABOUR

According to Nasscom’s India Strategy Summit 2005, there are insoluble challenges for the Indian IT sector in terms of infrastructure and talent requirement. The Indian IT industry aims at growing at a faster rate to reach the $60 billion mark in exports from the present $17 billion in just another five years. The Nasscom-McKinsey 2005 report highlights that the country may, by 2010, fall short of five lakh people in terms of required workforce for the IT sector. Presently, the total strength of people employed in the IT sector in India is seven lakh and by 2010, according to the report, it needs to add another 1.6 million suitable professionals. The main reason for the expected shortage is the lack of suitable talent required for the industry. India generates 2.5 million graduates every year, of which only 10 per cent are fit for jobs in BPOs. Only 25 per cent of the 3.5 lakh diploma holders or graduates who come out of the colleges are able to fit into the IT services area. This highlights the increasing need for improving the suitability of these potential workforce. There, the higher education system and its curriculum are required to adapt to the need of the industry.

SOCIAL SECTOR

Education

The Parliament has approved the constitutional amendment in the Education Bill providing reservation for scheduled castes and scheduled tribes in unaided private educational institutions, with the Rajya Sabha passing the Bill with near unanimity.  The purpose behind the Bill is to uplift those living below poverty line. However, the Bill excludes minority institutions from reservations. According to the left, it was the government’s duty to check the misuse of minority status to implement the scheme. Moreover, there might be other practical problems in the implementation of the scheme. Under the existing quota system, colleges are expected to admit students in reserved categories and collect Rs 120 per student. The remaining fees like tuition lab, library, gym, exam, magazine and computer practicals are to be paid by the state. However, the state is yet to reimburse colleges and hence, there is a general reluctance in admitting students without promises of a timely refund from the government. In addition to this, questions are also being raised about the capability of such students to cope up with affluent class students.

EXTERNAL SECTOR

Essar Steel has proposed to set up a special economic zone at Hazira in Gujarat for the steel industry at a cost of Rs 13000 crore.

In further liberalising the foreign investment regime, the government has said that foreign investors eligible through the automatic approval route should seek prior approval only in case of specific reasons. This means if a company wants to invest in a sector covered under the automatic route, it need not take the prior approval of the government. It will need to apply for government’s permission only if it is for a specific purpose.

Exporters have put blame for a dip in exports in November this year on faulty government policies. Uncertainty over the future of DFPB (duty entitlement pass book) scheme and imposition of various taxes on exporters have been identified as the main reasons for erosion of competitiveness of Indian exports.

INFORMATION  TECHNOLOGY

Close on the heels of its joint venture with the State Bank of India, TCS has tied up with Apollo Hospitals, the country’s leading hospital network, for developing joint assets in the healthcare domain. The TCS Life Sciences and Healthcare vertical has expertise in web-enabled hospital record management and patient record systems.

Pune-based Compulink Systems, an IP-led software products and services provider, got listed on the NSE and BSE on December 28, 2005.

TELECOM

NRI businessman C Sivasankaran has sold his entire 100 per cent equity in Aircel Televentures Ltd to Malaysia ’s largest telecom company Maxis Communications Berhad (Maxis) and to Reddys of the Apollo Hospitals group for $1.08 billion (Rs 4,860 crore). Aircel is the holding company of Aircel Ltd and Aircel Cellular Ltd, which owns mobile licences in 12 circles, including Tamil Nadu and Chennai. Maxis would hold a 65 per cent equity stake in Aircel directly while its joint venture (JV) with the Reddys will hold the remaining 35 per cent. Aircel has operations in Tamil Nadu, West Bengal, Orissa , Assam , North East and Jammu and Kashmir . It is expected to roll out services in five more circles by the end of next year. The unlisted Aircel claims 2005 revenues of $122 million, profit after tax of $25 million and an average revenue per user (ARPU) of $7.30.

In the first 10 months of 2005, India ’s largest telecom operator Bharat Sanchar Nigam Limited (BSNL) has registered surrenders of 23 lakh landline phones. In order to prevent the rapid rise in the number of landlines being surrendered and to take the tariff war from mobile to fixed-line phones, BSNL has announced a 28 per cent cut in its monthly rentals for fixed-line phones. Under the scheme, BSNL has cut the monthly rental to a flat Rs 180 from the existing Rs 250 in urban areas and Rs 210 in rural areas. As a result, the subscribers will save up to 28 per cent in the effective monthly bills. The public sector giant has witnessed a record 34.17 lakh surrenders of landline telephones in 2004-05, compared with 32.6 lakh surrenders in 2003-04 and 17.9 lakh in 2002-03. Currently, the mobile subscriber base in India stands at 71.46 million, against this, the total subscriber base of fixed lines is only 48.47 million. BSNL has also joined the tariff war with mobile operators and launched a pre-paid card with lifetime validity for Rs 949, which includes talk time of Rs 99.

*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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