Current Economic Statistics and Review For the Week Ended September 15

The broad philosophy behind the central government budgets these days, in fact behind all central and state budgets, has been set out in the Fiscal Responsibility and Budget Management Act, 2003 which entails, amongst other things, elimination of revenue deficit by March 2009 and reduction of gross fiscal deficit to 3 per cent of GDP by March 2008; the latter date was extended to March 2009 after the UPA government adopted the National Common Minimum Programme (NCMP). There is a deeper objective behind these deficit reductions. It has been repeatedly emphasized in the Government’s fiscal policy strategy statements, that there is a “fiscal drag due to government deficits (which) continues to hold back full achievement of potential economic growth” (2005 fiscal strategy statement). This fiscal compression strategy has been thrust on the system after structural adjustment and stabilization programmes were adopted in 1991. This has been done despite admission that expansionary fiscal policy adopted in the early 1980s had helped to more than double the annual GDP growth rate (2004 fiscal strategy statement). It has also been admitted that public expenditure as a proportion of GDP in

India

is small by international standards and that the low tax-GDP ratio, debt build-up and high deficits “are specific contexts that militate against an increase in public expenditure, despite developmental needs” (2005 fiscal strategy statement). It has been further argued that the overt focus on outlays and neglect of outcomes has led to serious shortcomings in realising the developmental objectives.

Following these mainstream fiscal adjustment perspectives, the government has sought to adopt an aggressive fiscal compression strategy, the core philosophy of which was set out by the Union Finance Minister not in the budget speech but in a post-budget financial daily interview: “I said I will draw a red, thick line and I will not breach it... Because I have to compress (the) fiscal deficit and revenue deficit, I drew that line, took the revenues and factored out the non-plan expenditure and that left me this money, which I said I am going to distribute” (Business Standard, March 2, 2006). With such a narrow perspective of the role of fiscal policy in the development process, all that rhetoric we see in the budget pronouncements can be a smokescreen to hide the absence of a broader developmental perspective.

On the other hand, the promises of the new government under the National Common Minimum Programme (NCMP) or otherwise made against the backdrop of the community’s disenchantment with the “India Shining” slogans, call for massive developmental expenditures for education, health and other social infrastructures, for special employment programmes and for physical infrastructures. These promises are embedded in sound economic logic, not just in aiming at an egalitarian society but in widening purchasing power in the vast masses of people so that effective demand for goods and services is augmented which can provide an impetus to the process of industrialisation. Therefore, the need of the hour is an expansionary budgetary policy. Is this possible against the backdrop of fiscal constraints – low tax to GDP ratio, absence of discipline in better outcomes, and large fiscal deficits – repeatedly pointed out by the government in its fiscal strategy statements? The objective of this note is to provide an alternative fiscal strategy that would be both sustainable in the medium-term and helpful for rapid and healthy growth.

We wish to present this broader fiscal strategy against the backdrop of what has been proposed in the Central budget for 2006-07.

On the expenditure front, increases in expenditures on six components of the Bharat Nirman programme and on eight flagship programmes stand out. The six components of the Bharat Nirman programme – accelerated irrigation benefit programme, accelerated rural water supply project, rural roads programme, rural houses under the Indira Awas Yojana, rural electrification and rural telephone connectivity – will have a budgetary provision of Rs18,696 crore (or 3.3 per cent of total expenditure) during 2006-07 – a rise of 54 per cent over that of Rs 12,160 crore (2.4 per cent) provided in 2005-06. The eight flagship programmes of the UPA government are: Sarva Siksha Abhiyan, Mid-day Meal Scheme, Rajiv Gandhi Drinking Water Mission, Total Sanitation Campaign, National Rural Health Mission, Integrated Child Development Services, National Rural Employment Guarantee Scheme and Jawaharlal Nehru National Urban Renewal Mission. These eight flagship programmes will receive an allocation of Rs 50,015 crore (or 8.9 of the total expenditure) in 2006-07 showing an increase of Rs 15,088 crore or 43.2 per cent over Rs 34,927 crore (6.8 per cent).

The budget provides for a 10.9 per cent increase in total expenditure, comprising of 20.1 per cent rise in plan expenditure and 7.2 per cent rise in non-plan expenditure (Table 1). On the non-plan side, the bulk of the increase has taken place in the defence budget (Table 3). Interest payments are, of course, the largest component and they are expected to rise by 7.5 per cent. On the plan side, central plan is expected to rise by 29.7 per cent but the central assistance to states would rise only by 15.9 per cent (Table 4). These represent revenue components of the plan. The capital expenditure under the plan, on the other hand, would show an absolute fall of 2.5 per cent. This indicates that the entire budgetary support for the plan seems to be of a current nature. On the other hand, the bulk of the increases in Central Plan outlays under energy, railways and communications, ranging from 25 per cent to 30 per cent (Table 6). It seems obvious that these have come from ‘internal and extra budgetary resources of public enterprises’ (Table 5). The budget as such has not been used for deploying capital expenditure as shown in Table 4. As explained below, the plan expenditure used for social expenditure and rural development, which are of a revenue nature, have shown meagre increases in the first place and some of them are from levies mobilised specifically for such social expenditures.

On the face of it, revenue trends proposed in the budget appear buoyant. A rise of 19.5 per cent in gross tax revenue against only 0.2 per cent rise in 2005-06 (RE) appears commendable. Corporate tax revenue will expand by 28.4 per cent against a fall of 6.3 per cent in the previous year (Table 2), is explained by the increased burden imposed on MAT companies. Income tax revenue is expected to rise by 16.9 per cent, customs by 20.0 per cent and the service tax 50 per cent. All these are feasible. Though income-tax rates have not been altered, recent trends in income increases of upper middle classes suggest buoyancy; in the previous year vast concessions were given in tax rates and hence there was no rise in income-tax revenue. Imports, both oil and non-oil, are rapidly rising and a 20 per cent rise in customs revenue, the same as it was in 2005-06 (RE), appears reasonable.

As explained above, a sustainable budgetary programme is possible at this stage of

India

’s development. First, centre’s tax-GDP ratio, which was reduced after the reforms from about 11 per cent to below 9 per cent throughout the decade of the 1990s, has to be sharply improved. The budget proposes to improve it to 11.2 per cent. Even an increase from 11.2 per cent to 11.5 per cent would have meant an additional revenue of Rs 12,000 crore. Second, the reductions in fiscal deficits could have been avoided. Adopting a little more flexible approach to the mandates of the FRBM Act, the government could have saved about Rs 15,000 to Rs 20,000 crore for physical and social infrastructure expenditures. Third, some moderate use of ways and means advances from the RBI, say to the extent of Rs 6,000 to Rs 10,000, can be very helpful in bridging the revenue gaps within individual years.

Thus, an expansionary fiscal policy in the current context, which is the need of the hour, ought to have addressed the following issues:

(ii) crisis in agriculture requiring a decisive push to long-term investment in agriculture, particularly for irrigation;

In the above respect, a few suggestions offered below are intended to show that a better viable alternative fiscal strategy is available, without hurting the interests of even the middle classes.

While the 16.9 per cent increase in income-tax revenue anticipated for 2006—07 appears attractive, it is to be judged against two artefacts of revenue collections. First, it is found that the so-called buoyancy in income-tax revenue has occurred in recent years because there has occurred a sharp rise in the number of people earning above Rs 10 lakh; such number has shot up from 1,564 in 1990-91 to 78,109 in 1990-2000, or those earning Rs 2 lakh and above, the number has gone up from 38,213 to 5,27,901 during the same period. It is this shift of incomes in favour of richer classes that is responsible for the tax buoyancy. In 1990-91, only 6.3 per cent of income tax revenue was from the assessees having taxable incomes of over Rs10 lakh; this proportion has gone up to 23.5 per cent. In fact, it could have been much larger but for the fact that the average incidence of income-tax on assessees having incomes of over Rs 10 lakh has dropped from 45.3 per cent in 1990-91 to21.4 per cent in 1999-2000. Data on income-tax revenue are available only up to 1999-2000. In fact the incidence would have further come down in the next 5 to 6 years. It is not our contention suggestion that tax rates have to be raised to punitively high levels. No doubt, it should be moderate but what has been done over years, has been too drastic.

In the above respect, it is to be recognized that non-farm incomes have ceased to be any reasonable measure of the taxable capacity of the rich and the middle classes. We have concrete evidence of this in the returns of incomes and assets filed by candidates contesting in parliamentary election (last general election) and elections for state assemblies. If we are serious about tax reforms, we ought to seek to capture three main sources of their escape from the clutches of the income tax; they are: wealth, capital gains and personal estate earned on inheritance. This calls for resorting to the Kaldorian tax system of obtaining integrated tax returns from non-farm assessees combining their earnings and holdings of income, wealth, capital gains, inherited personal estate and gifts and imposing taxes on them separately. There have been mindboggling increases in the values of such assets as compared with the mid-1950s to the mid-1960s when the Kaldorian system was briefly in operation but in a half-hearted manner. The current wealth values represent also the past un-earned incomes on which taxes were evaded or avoided.

Despite the rapid decline in public sector investment in agriculture – large-scale irrigation in particular, the budget shows no awareness of the agricultural crisis except for passing on the burden of credit to the banking system. Because of private investment in agriculture being very much dependent on public sector investment, the provision of larger institutional credit will lead to further frustration amongst the farm community. It is a spurious argument that agriculture is a state subject when broader developmental issues are concerned. The centre has always prepared schemes for plan programmes in areas which legitimately belong to the states. A meagre provision of Rs 5,219 crore for 2006-07 against Rs 4,300 crore in 2005-06 (RE) for the Department of Agriculture and Cooperation without any new programmes speaks volume for the centre’s apathy. Central Plan outlay for irrigation and food control are placed are placed at Rs 587 crore in 2006-07 as against Rs 418 crore in 2005-06. There ought to have been special initiatives on the part of the centre to give a push to agricultural investment.

In the filed of education and health, the increases proposed except for primary education, are not exciting considering the top-most priority that is being held out for social sector development and considering the vast gaps that exist in physical achievements in these areas. To achieve the Millennium Development Goals, expenditures under these heads may have to be doubled in the next few years even as organisational strengthening takes place to absorb the extra expenditures. Day-in and day-out, it is said that a quantum leap from the miniscule 0.9 per cent now to 3.0 per cent of GDP is required for health expenditure. Therefore, a 30 per cent increase in the budget of the Department of Health and Family Welfare from Rs 9,676 crore in 2005-06 (RE) to Rs 12,546 crore cannot be a satisfactory achievement at all. The share of the National Rural Health Mission, a major flagship programme in it, has just risen from 62.8 per cent to 64.9 per cent in the Department’s budget for 2006-07.

In the allocations for education, the picture appears on the face of it more interesting. The allocation for Elementary Education will go up from Rs 11,220 crore in 2005-06 (RE) to Rs 15,371 crore – a rise of 36.7 per cent. But, the flagship programme of Sarva Shiksha Abhiyan is funded by the 2 per cent Education Cess and partly by external funding agencies (The latter have provided Rs 4,700 crore for 4 years 2003-04 to 2006-07). The estimated receipts from the Education Cess would amount to Rs 8,746 crore in 2006-07. There is much less provision for education from the general revenues.

The world over the bulk – over 90 per cent – of major infrastructure expenditures are undertaken in the public sector. As pointed out earlier, almost the entire allocation seems to have occurred from out of the extra budgetary resources of public sector undertakings. There was scope for further increases in physical infrastructure expenditures from out of in the budgetary resources.

Table 6: Central Plan Outlays (Rupees, Crore)
	2005-06 (RE)	2006-07 (BE)
Energy	57,720	69,593	+ 29.5 per cent
Transport	40,412	48,614	+ 20.3 per cent
Railways	18,265	22,764	+ 24.6 per cent
Communications	17,525	19,884	+ 13.5 per cent
Source: Union Budget 2006-07

(i) The most disquieting of the Budget concerns the reluctant provisions made for the National Rural Employment Guarantee (NREG) Scheme. Until last year, two were major programmes were: SGRY scheme and National Food-for-Works (NFW); the two together had a total expenditure of Rs 11,700 crore in 2005-06 (RE). In the latest budget, for them only a meagre provision of Rs 2,700 crore has been made. For the NREG scheme itself, only Rs 10,170 crore has been provided for. Thus, for the NREG scheme, which is being implemented with so much fanfare and which is supposedly a novel programme for direct attack on poverty , the increase in provision works out to a meagre Rs 1,170 crore or 10 per cent from Rs 11,700 crore in 2005-06 (RE) to Rs 12,870 crore in 2006-07 (Table 7).

(ii) There is more to it than meets the eye. In both SGRY and NFW programmes, there was a major foodgrains component. With the drastic reduction in foodstock so as to central subsidy, no provision has been made for foodgrains component against the employment programme.

(iii) All these are being done at a time when the NSSO’s 60^th Round (January-June) has revealed that the unemployment rate for males has sharply increased from 5.6 per cent in 1993-94 to 9.0 per cent in 2004 in rural areas and 6.7 per cent to 8.1 per cent in urban areas. For females, it has risen from 5.6 per cent to 9.3 per cent in rural areas and from 10.5 per cent to 11.7 per cent in urban areas. Also, unemployment rates on the basis of current daily status (CDS) in the reference week has been much higher than those on the basis of usual status (unemployed on an average in the reference year), implying a higher degree of intermittent unemployment or the increased incidence of the absence of regular employment for many who are supposedly working; thus the quality of employment has suffered a setback in recent years.

Budget (2006-07) Proposals

Provision of short-term credit at seven per cent, with an upper limit of Rs 3 lakh on the principal amount. (Effective from kharif 2006-07). For this Nabard will be compensated by offering subvention.

A relief amounting to two percentage points of the borrower's interest liability on the principal amount up to Rs 1 lakh to the farmers, who have availed crop loans from scheduled commercial banks, RRBs and Primary Agricultural Credit Societies for kharif and rabi 2005-06. The amount will be credited to the borrower's bank account before March 31 and a budgetory provision of Rs 1,700 crore has been made for this purpose.

Banks are asked to increased the farm credit to Rs 1,75,000 crore in 2006-07, up from the level of Rs 1,25,309 crore in 2004-05 and also add another 50 lakh farmers to their portfolio. For tenant farmers, banks have been asked to open a separate window for self-help groups or joint liability groups of tenant farmers and ensure that a certain proportion of the total credit is extended to them.

Increase in the total outlay under AIBP to Rs 7,121 crore for 2006-07 and the Central Government will support the programme through a grant of Rs 2,350 crore. The States are expected to spend about Rs 2,520 crore from their resources, and 25 projects are expected to be completed before the year-end.

The programme for repair, renovation and restoration of water bodies is being implemented through pilot projects in 23 districts in 13 States.

Setting up a Special Purpose Tea Fund as a part of 15-year programme for massive re-plantation and rejuvenation of tea, with the contribution of around Rs 100 crore by the Centre for 2006-07.

Imposition of a levy of 4 per cent Countervailing duty (CVD) on the imports of vegetable oils

The Central government has decided to import half a million tonne wheat from

Australia

’s AWB, formerly the state owned Australian wheat board, at $179 per tonne on cost and freight basis. However, this import has met with the obstacles pertaining to the quality and the terms of shipment. It has been claimed that the tender criterion on grain quality that is the protein content specified in the tender is 10 per cent, which is below the protein content of 12 per cent present in the domestically produced wheat. The shipment being offered on a cost-and-freight basis; has also been objected, since generally it is done under the free-on-board system.

On the other hand, to control the spiralling wheat prices in domestic market, the Food Corporation of India (FCI) would release 1 lakh tonne of wheat under the open market sale scheme as the first instalment in March 2006. While 10,000 tonnes of wheat would be released each for Delhi, Haryana, Punjab, Tamil Nadu, Maharashtra; 5,000 tonnes each for Jharkhand, Orissa, West Bengal, J&K, Andhra Pradesh, Kerala, Karnataka and Gujarat; 4,000 tonnes for Uttaranchal; and 3,000 tonnes each for Madhya Pradesh and Chhattisgarh.

Indian Sugar Exim Corp Ltd (ISECL) has contracted a deal to export 50,000 tonne of white sugar to Pakistan at $ 478 per tonne for delivery at Karachi port. The export deal is for medium grade white sugar. Pakistan recently lifted a four-year ban and allowed sugar imports from

India

to check spiralling prices in the country.

In order to boost the brewery sector, the ministry of food processing industries proposes to set up a beer board at the central level, which would mainly focus on standardization in quality, pricing and raw material sourcing.

The Centre has revised the tariff value on various grades of vegetable oils following the budgetary proposals hiking customs duty on hydrogenated vegetable oil (vanaspati) to 80 per cent, bringing it on a par with other refined oils.

Tariff values on vegetable oils are periodically adjusted to align with the changes in global prices. Unlike the budgetary proposal for hiking import duty on vanaspati, which comes into effect from April 1, 2006 , the revised tariff values comes into effect from March 1, 2006 itself. Soyabean oils of all grades have the lowest import duty of 45 per cent, same as the WTO-bound tariff rate. Hence, the tariff value on crsoyabean oil has been fixed at $ 524 a tonne.

Automobiles: The excise duty on small cars of less than 1200 cc petrol engine and 1500 diesel engine has been reduced to 16 per cent.

Pharmaceuticals: The custom duty on cancer and AIDs drugs has been brought down to 5 per cent.

Chemicals: The custom duty on basic and organic chemicals has been reduced from 15 per cent to 10 per cent, that on basic cyclic and acyclic hydrocarbons and their derivatives to 5 per cent and on catalysts from 10 per cent to 7.5 per cent.

Plastics: The custom duty on bulk plastics like PVC, LDPE and PP have been brought down to 5 per cent from 10 per cent, on raw materials for plastics like styrene, EDC and VCM to 2 per cent and naphtha for plastics is to have nil duty.

Packaging: The custom duty on packaging machines has been brought down to 5 per cent from 15 per cent.

Paper: The custom duty on certain specified printing, writing and packing paper has been reduced to 12 per cent.

Food Processing: Condensed milk, ice cream, preparations of meat, fish and poultry, pectins, pasta and yeast have been exempted from excise duty. The excise duty on ready-to-eat packaged foods and instant food mixes like dosa and idli mixes has been reduced to 8 per cent.

In the budget 2006, the cess on oil has been increased from Rs 1800 per tonne to RS 2500 per tonne.

Three leading power developers have signed agreements with the Arunachal government to develop hydro power projects with total capacity of 4,800 MW at an estimated investment of around Rs 25,000 crore.

The Economic Survey 2005-06 has indicated a marginal improvement in the fragile financial health of the power sector across the country. The rate of return (RoR) of state electricity boards has improved from –32 per cent in 2004-05 to –26 per cent in 2005-06. The gains have come through lower gross subsidy on sales to the agriculture as well as domestic consumer segments besides higher subvention from state governments. The survey projects, based on Planning Commission estimates, further improvement in the health of the power sector during 2006-07. It has projected a RoR of -25.12 per cent during 2006-07.

In the Economic Survey 2005-06 the Tenth Plan target capacity addition of 41,110 MW has been downwardly revised to 34,000 MW, reflecting 83 per cent fulfilment of target. Though a shortfall, it represents a vast improvement over the previous achievements. For, during the Eighth and Ninth Plan periods, the targets were missed by as much as 50 per cent. Also, the total inter-regional transmission capacity is planned to increase from its present 9.450 MW to about 37,150 MW by 2012.

The finance minister in the budget for 2006-07 has extended tax breaks for ultra mega power projects to 2010.

The Economic Survey has stressed the importance of further liberalisation in the

coal mining sector and suggested that an associated coal mining company engaged in captive mining to be allowed to sell excess coal to appropriate end users. The Survey also suggested allocation of coal blocks for captive mining through price-based auctions and liberalisation of FDI restrictions.

The budget 2006 has proposed to increase the import duty on steel melting scrap from 0-5 per cent while reducing the duty on ready steel from 10-7.5 per cent.

The railways are expected to lose about Rs 400 crore due to the 10-18 per cent reduction in upper class fares and 8 per cent cut in the tariff for petrol and diesel. The total resource mobilisation is expected to be negative compared to Rs 650 crore earned through changes in freight rates in 2005-06. The ministry expects to increase earning through volumes – it has projected a 12.1 per cent rise in volumes and 14.4 per cent rise in earnings for the current fiscal year. It has estimated an increase in earnings from commodities like iron ore, steel, cement and foodgrains as against a drop in earnings from petroleum oil and lubricant traffic.

According to figures for April-January 2005 the rail co-efficient (the railways’ share in carrying a commodity as compared to its total production) for steel has gone up by 2.14 percentage points to 36.1 per cent and that for coal has increased by 1.51 percentage points to 75.62 per cent.

The budgetary support for NHDP has been hiked from Rs 9320 crore to Rs.9945 crore in 2006-07. Also, commencement of Phase VI of NDHP has been announced, which involves upgradation of four-laned highways up to 1000 kms to six-laned access controlled expressways.

The annual point-to-point inflation rate based on wholesale price index (WPI) has gone up to 4.34 per cent for the week ended February 18, 2006 from 4.02 per cent during the previous week. The inflation rate was at 4.89 per cent in the corresponding week last year.

The WPI in the week under review has risen by 0.3 per cent to 197.1 from 196.6 for the previous week (Base: 1993-94=100). The index of primary articles’ group (weight 22.02 per cent) has risen considerably by 0.5 per cent to 195.2 from the previous week’s level of 194.3, due to a significant increase in the price index of non-food articles and minerals by 1 per cent and 9.2 per cent, respectively. The index of non-food articles has gone up to 176.7 from 174.9 in the previous week, mainly due to higher prices of soyabean, groundnut seed, raw tobacco, sunflower and castor seed. Similarly, the index of minerals has gone up to 389.5 from 356.6 for the previous week, due to higher prices of silica sand, felspar and iron ore. The index of ‘fuel, power, light and lubricants’ group (weight 14.23 per cent) has also increased marginally by 0.1 per cent to 311.9 from 311.6 in the previous week, due to the higher prices of furnace oil and bitumen. The index of ‘manufactured products’ group constituting the maximum of 63.7 per cent of total weight, has also risen by 0.2 per cent to 172.1 from the previous week’s level of 171.8, mainly due to increased prices of food products, textiles, ‘chemical and chemical products’, ‘non-metallic mineral products’ and base metals.

The latest final index of WPI for the week ended December 24, 2005 has been revised upwards; as a result both, the absolute index and the implied inflation rate stood at 197.2 and 4.62 per cent as against their provisional levels of 196.8 and 4.40 per cent, respectively.

The rate of inflation has generally remained contained in the range of 4 to 4.5 per cent in last two months. According to the recently published Economic Survey 2005-06 by the Central Statistical Organsiation (CSO), the annual point-to-point inflation rate is expected to be at around 5 per cent at the end of March 2006.

The Union Budget 2006-07 was presented in the background of a non-food credit growth in excess of 25 per cent reflecting an investment boom in the country. The budget proposes to increase the credit flow to the farm sector to an amount of Rs 175,000 crores, an increase of 23.6 per cent during 2006-07. This would amount to adding another 50 lakh farmers to the banking industry's portfolio. In light of the severe difficulties faced by the farmers in some parts of the country, the budget proposes to grant some relief to those farmers who have availed of crop loans from scheduled commercial banks, RRBs and PACS for Khariff and Rabi 2005-06. An amount equal to 2 per cent points of the borrower's interest liability on the principal amount upto Rs 1 lakh will be credited to the farmers account before March 31, 2006 .

The government has also decided to ensure that the farmer receives short-term credit at an interest rate of 7 per cent with an upper limit of Rs 300,000 on the principal amount. This could potentially have adverse implications on the credit quality of the banks going forward.

Considering the importance of the food processing industry to the overall economy in terms of job creation, benefits to consumers and savings from wastages, this industry has been treated as a priority sector for bank credit. NABARD will create a separate window with a corpus of Rs 1,000 crore for refinancing loans to the sector.

Fixed deposits with tenure of 5 years or more will be eligible for tax benefits under Section 80C of the Income Tax Act. This could act as a major boost for mobilisation of long term funds by banks.

It has been clarified that no deduction would be available for outstanding interest amounts converted into loans. This could impact debt-restructuring plans of banks with the borrowers. Further, this amendment is intended to have retrospective impact.

However, the much anticipated relaxation on the cap of voting rights in banking companies has not been addressed.

The Budget has proposed to convert Rs 22,808 crore of recapitalisation bonds issued to 19 nationalised banks into tradable, statutory liquidity ratio (SLR) securities. The move will infuse liquidity in the banking system thus providing an impetus for greater credit offtake.

1) Loans to food processing sector to be included in the priority-sector lending basket

2) ATM operations and collection services provided by banks in public issues to be brought under the service tax net.

3) Banking Cash Transaction Tax to continue for some more time until the AIR system is able to capture all significant financial transactions.

4) Allow banking companies to issue preference shares to boost their Tier-I capital.

The interchange fee charged by banks for using the ATM network of other banks may shoot up by Rs 3 – 6. Nevertheless, direct customers of banks may not be charged the additional burden of service tax. This follows the Union Budget announcement on February 28, 2006 to levy service tax on input services received by banks in maintaining the ATM network. The various operations to be taxed include maintenance and management of hardware, software, cash replenishment, operation of the ATM etc.

Liquidity crunch in the banking system and need for additional capital to cope with the new prudential norms of Basell II may see banks hiking the interest rates for 5 year deposits even as some of the banks are devising ways to raise long term money through floating rate instruments. The recent announcement in the Union Budget making long-term deposits eligible for tax exemption under Section 80 C has been the incentive. Bankers look forward to long-term deposit rates to go up by at least 50 basis points to remain competitive with other long-term investment options. Some of the banks, which may lead the band, would be ICICI Bank, IDBI Bank, HDFC Bank, Allahabad Bank and Canara Bank. As per industry estimates, bank deposits comprise more than 40 per cent of total financial household savings and almost every household considers them to one of the core investment options. Although banks are yet to take a call on a possible hike in deposit rates, the budget has offered an incentive to help banks to mobilize more retail deposits.

The union budget 2006-07 has been presented in the Lok Sabha on February 28, 2006 . According to revised estimates, the revenue deficit for 2005-06 will be 2.6 per cent of GDP and fiscal deficit 4.1 per cent of GDP.

Plan expenditure for 2006-07 is estimated at Rs 172,728 crore, up by 20.4 per cent. As a proportion of total expenditure, plan expenditure has increased from 26.6 per cent in 2004-05 to 28.3 per cent in 2005-06 (RE) and further to 30.6 per cent in 2006-07 (BE). Non-plan expenditure in 2006-07 is estimated to be Rs 391,263 crore. The total expenditure is estimated at Rs 563,991 crore in 2006-07. Revenue deficit is estimated at 2.1 per cent of GDP and fiscal deficit at 3.8 per cent of the GDP in 2006-07.

No change in the rates of personal income tax or corporate income tax has been announced in the budget 2006-07 and no new taxes have been imposed. The one-by –six scheme under the income tax act obliging certain categories of persons to file returns has been abolished. The rate under minimum alternate tax (MAT) which is 7.5 per cent of book profits is to be increased to 10 per cent. An increase of 25 per cent on all rates of Securities Transaction Tax (STT) is proposed.

In line with the government’s policy of reducing customs duties, the finance Minister has proposed to reduce the peak rates for non-agricultural products from 15 per cent to 12.5 per cent. About excise duty, the Finance Minister intends to converge all rates at the CENVAT rate which is at 16 per cent .

As service sector is estimated to be 54 per cent of GDP in 2005-06, the Finance Minister proposes to bring more services under the service tax net. The new services to be covered include ATM operations, maintenance and management, registrars, share transfer agents and bankers to an issue, sale of space or time, other than in the print media, for advertisements, sponsorship of events, other than sports events, by companies, international air travel excluding economy class passengers, container services on rail, excluding the railway freight charges, business support services, auctioneering, recovery agents, ship management services, travel on cruise ships and public relations management services. April 1, 2010 has been set as the date for introducing Goods and Service Tax (GST). Service tax rate has been increased from 10 per cent to 12 per cent.

In his Budget speech, the Finance Minister has mentioned some measures to modernize tax administration. The departments of Income Tax and Customs and Central Excise will undergo business process reengineering (BPR). Nationwide networks will connect 745 income tax offices in 510 cities and 550 customs and central excise offices in 245 cities, creating national databases. National data centres, data warehousing facilities and disaster recovery sites are being set up. Jurisdiction-free filing of returns, online tracking of status of accounts and refunds of income tax will be possible. Both departments to have fully computerized networks by end-2006.

JK Cements that had tapped the market with its IPO issue of 2 crore equity share of Rs 10 each in a price band from Rs. 145 to Rs 155 per share has finalised its issue price at Rs 148 per share. The issue was subscribed 1.80 times while the QIB portion was subscribed 2.99 times.

Prediction of a healthy growth rate of 8.1 per cent by the Economic Survey and the strong trend in the Asian markets helped in supporting the positive sentiments on the bourses, which was reflected in the rise in BSE sensex to 10595.43 points on March 3 as against 10200.76 points on February 24, weekly gain of 3.87 per cent. Like wise the S & P CNX Nifty also registered a gain of 3.19 per cent as it closed at 3147.35 points on March 3 as compared to 3050.50 points on February 24. On the budget day, irrespective of a 25 per cent hike in the STT rates, both the indices closed at new all-time high levels with the sensex closing at 10370.84 points and Nifty closing at 3074.70 points. However, a fall in the Asian indices, marginal rise in the domestic inflation rate and a hike in the international crude oil prices towards the end of the week affected the market sentiments as a result the bourses registered a decline on the last day of week under review.

The FIIs were net buyers during the week to the extent of Rs 2809 crore with purchases at Rs 9815.5 crore and sales worth Rs 7006.5 crore. Ahead of the budget day, the FIIs were net buyers to the tune of Rs 1001.8 crore- the highest amount in February 2006. Likewise, the mutual funds were also net buyers in the equity to the extent of Rs 616.6 crore with purchases worth Rs 3460.06 crore and sales of Rs 2843.46 crore.

During the week, the NSE’s F & O segment witnessed huge trading interest with an average daily turnover of Rs 27997 crore. On February 28, the turnover crossed the Rs 36000 crore mark as it stood at Rs 36876.74 crore. It being the first week after the expiry of February contracts, the outstanding positions increased across the board. Meanwhile, irrespective of the increase in the STT tax proposed in the budget, the segment remained buoyed supported by news that around $ 1 billion worth of Japanese funds are waiting to invest in

India

RBI announced the auction of 182-day and 91-day treasury bills for a notified amount of Rs 500 each under the regular auction calendar. The auction will be conducted on March 8, using multiple price method. Meanwhile, during the week, the RBI has mopped up Rs. 961.82 crore through 91-day treasury bill and Rs 1000 crore through 364-day treasury bills. The cut-off yields for the 91-day and 364-day treasury bills were set at 6.6877 per cent and 6.7992 per cent, respectively.

During the week under review, the RBI has conducted the auction of State Development Loan (SDL), 2016 for 12 states for an aggregate amount of Rs 3629.68 crore. the cut-off yield for SDL 2016 for Assam, Goa, Madhya Pradesh and Rajasthan was 7.65 per cent, for Maharashtra, Sikkim, Tripura and Uttarranchal was 7.70 per cent, for Kerala, Punjab, Tamil Nadu and Uttar Pradesh were 7.75 per cent, 7.67 per cent, 7.68 per cent and 7.85 per cent, respectively.

In the Budget 2006-07, the finance ministry has hiked the limit of FII investments in the gilt-edged securities from $1.75 billion to $2 billion.

Excess advance covering by banks, in addition to increased supplies by way of government spending eased the pressure on call rate as the rates ended the week at 6.5-6.7 per cent against 6.7-6.9 per cent in the previous week. Amid signs of improved liquidity, the average daily subscription at the repo declined to Rs 4901 crore as against Rs 17527 crore in the previous week; while the average daily subscription at the reverse repo auction rose to Rs 746 crore as against Rs 86 crore previous week. Meanwhile, the cumulative collateralized borrowing and lending obligation volumes for the week rose to Rs 90604.5 crore from Rs 84601.6 crore.

Yes Bank has raised Rs 100 crore through private placement of bonds with Rabobank International, which has a 19.5 per cent equity stake in the bank.

Bank of India is planning to tap the market to raise Rs 200 crore by way of redeemable, non-convertible, subordinate bonds.

In the Union Budget 2006-07, in order to increase the depth of the corporate debt market, the finance ministry has hiked the limit of FII investments in corporate debt from $0.5 billion to $1.5 billion. Further, it has also proposed to launch a single unified exchange traded market for corporate bonds and also allow mutual funds, pension and provident funds in the NDS platform.

The rupee stood 0.2 per cent stronger at 44.35 per dollar from 44.43 per dollar over the week. The Union Budget’s support for fiscal consolidation and growth, including a $1.25 billion increase in the FII cap on bond investment also boosted the rupee. However, suspected RBI intervention through state banks forced the rupee to pare gains on each occasion. Forward premia moved up across tenors. The six-month annualised premia stood at 2.53 per cent as against 2.23 per cent in the previous week.

As against the previous week wherein pulses saw surge in their prices, this week their prices have generally fallen down, barring chana which has sustained its gains.

In February, the delivery of chana and urad on NCDEX rose to 3430 mt and 3020 mt from 2750 mt and 1490 mt in January, respectively. On the other hand, the deliveries of gold registered a huge decline from 73 kg in January to just 17 kg in February.

MCX is expecting an infrastructure status for commodity exchanges and related eco-system institutions, like warehousing companies. Further, the exchange has also called for allowing physical market profit/loss to be offset against derivative contracts, loss or profit on electronic additable, national-level commodity exchanges in line with the practice in the stock exchanges.

FCI will start trading maize on the NCDEX and MCX within a month. Of the total maize procured by FCI, only a small quantity would be traded on the commodity exchanges. FCI procures about 5 lakh tonne of maize each year, of which only a small part is diverted to the public distribution system. The officials said that maize sold through tendering is not always profitable and thus trading at the exchange is been planned.

In the Union Budget 2006-07, the following steps have been proposed to boost the commodities futures market performance:

In-principle agreement to replace income-tax with a presumptive tax and also to set up an expert committee for the gem and jewellery sector,

Excise duty on packaged foods and instant food mixes to be reduced from 16 per cent to 8 per cent.

A Jute Technology Mission will be launched in 2006-07 and a National Jute Board will be established.

Cut in import duty on non- ferrous metals such as aluminium and copper to 7.5 per cent from 10 per cent.

Crisil has assigned ‘AAA/Stable’ rating to Rabo India Finances’s Rs. 400 million non-convertible debentures programme. Further, the agency has also reaffirmed the ‘AAA/Stable’ rating assigned to the company’s various non-convertible issues with amount ranging between Rs. 250 million and Rs. 500 million. The rating continue to be based on Rabo India Finance Private Limited’s full ownership by, and strategic importance to, its parent Rabobank Nederland. The close linkage with the parent implies a strong economic rationale and moral obligation on the part of the Rabobank group to support Rabo India Finance.

Crisil has assigned ‘AAA/Stable’ rating to CitiFinancial Consumer Finance India Limited’s Rs. 3 billion non-convertible debentures programme. The agency has also reaffirmed the ‘AAA/Stable’ and ‘P1+’ rating assigned to the company’s non-convertible debenture programme aggregating to Rs 34.50 billion and its Rs 7.25 billion short-term debt programme. The rating reflects the company’s 100 per cent ownership by Citigroup and the strategic importance of CitiFinancial to Citigroup Inc’s

India

business plans.

Crisil has assigned ‘AAA/Stable’ rating to the proposed Rs 500 million non-convertible debenture issue of Oil ans Natural Gas Corporation Limited (ONGC). The rating reflects ONGC’s dominant position in the Indian oil and gas industry, supported by its excellent capabilities and long track record of efficient operations.

Crisil has reaffirmed the ‘AA/Stable’ rating assigned to Maharashtra Seamless Limited’s Rs 150 million non-convertible debenture programmes. The rating takes into account the company’s market leadership in the domestic seamless pipes industry, strong operational capabilities and cost efficiency and favourable financial risk profile.

Crisil has reaffirmed the ‘AAA/Stable’, ‘FAAA/Stable’ and ‘P1+’ ratings assigned to BASF India Limited’s non-convertible debenture issue aggregating to Rs 8002 million, fixed deposit programme and Rs 600 million commercial paper programme, respectively. The ratings reflect the company’s strong business and financial risk profile as well as strong parent support. BASF India enjoys strong market position in most of its business segments, namely performance chemicals, agrochemicals, and plastics; the business is further spread across different customer segments, lending stability to revenues. BASF India receives consistent operational and technological support from its parent, BASF AG; the company enjoys the benefits of strong synergies arising from similar businesses.

Crisil has reaffirmed the real estate developer rating ‘DA1’ on Prestige Estates Projects Private Limited .The rating indicates that the developer has an Excellent track record of executing real estate projects as per the agreed quality levels and in transferring a clear title within the stipulated time schedule.

Icra has up-graded ‘LA (SO)’ rating assigned to Rs.2.37 billion bonds programme of Punjab Infrastructure Development Board (PIDB) to ‘LAAA (SO)’ .The rating upgrade takes into account change in structure wherein the existing escrow mechanism has been substituted by an unconditional and irrevocable Bank Guarantee (from ICICI bank, rated AAA by ICRA) for the repayment of principal and interest due on the rated bonds. The rating also factors in the operating surplus generated by PIDB, moderate debt levels and financial flexibility in terms of significant cash and bank balances.

Icra has assigned an outstanding rating of ‘LAA+’ to Rs 200 million non-convertible debenture programme of BOB Housing Finance Limited (BOBHFL). The rating is critically dependent on the support from the parent 'Bank of Baroda (BOB)' and its stated intent to merge the housing finance company with itself after buying out the equity stake of National Hosing Bank, its only other shareholder.

Icra has assigned ‘LAAA (SO) rating to the Rs 1.08 billion purchases payouts backed by commercial vehicles loan pool originated by Sundaram Finance Limited. The rating is based on the strength of cash flows from the underlying asset pool, the available credit enhancement in the form of cash collateral and the integrity of the legal structure.

Icra has put the ‘A1+’ rating assigned to Rs. 15 crore commercial paper programme of Godrej Agrovet Limited (GAVL), on rating watch with developing implications, following the reported outbreak of the bird flu. Subsequent to the outbreak local governments in the affected areas have implemented orders for the culling of poultry birds and restriction on transportation of poultry products.

Icra has assigned an ‘A1+’ rating to the Rs.2, 000 million commercial paper programme (enhanced from Rs.1, 000 million) of IL&FS. The ratings factor in IL&FS’s favourable asset quality, profitability of its corporate credit portfolio, comfortable capitalisation and the expected gains from the sale of some of its strategic investments in the near term.

Icra has assigned an ‘A1+’ rating to the Rs.3, 500 million short-term debt programme (enhanced from Rs.2, 000 million) of Kotak Securities Limited (KSL). The ratings factor in KSL’s strong institutional and retail equity broking business, its adequate capitalisation, strong liquidity and the sound risk management systems employed by the company.

Fitch Ratings has assigned a National Long-term rating of ‘AA+( Ind )’ to UTI Bank Limited’s (UBL) proposed Rs 10 billion subordinated debt programme. At the same time, the agency has also affirmed the ‘AA+( Ind )’ rating of its existing Rs 15bn subordinated debt programme. The assigned ratings reflect the bank’s improved quality of earnings and risk management systems, and its adequate capitalisation and asset quality.

In the Union Budget of 2006-07, government has increased the minimum alternative tax on corporates from 7.5 per cent to 10 per cent. It has not levied any new taxes and the personal income tax on corporates remained unchanged.

In the Budget 2005-06, the government has reduced the excise duty on small cars to 8 per cent from 16 per cent. Prices of cars that are imported as completely built units (CBU) are likely to go up, following the imposition of a countervailing duty (CVD) of 4 per cent on imported cars. As a result, General Motors India Limited, Honda Siel Cars India, Maruti Udyog Limited, Tata Motors have reduced their prices of cars.

In the Union Budget 2006-07, the government has reduced the custom duty on air conditioner, compressor and parts from 15 per cent to 12.5 per cent.

The government has reduced the custom duty on aluminium, copper, and zinc from 10 per cent to 7.5 per cent, while a 4 per cent special countervailing duty has been imposed.

In the Budget the government has re-imposed an excise duty of 12 per cent on computers and it has exempted DVD drivers, Flash drivers and Combo drivers from the excise duty.

The excise duty on all man-made fibres, polyester staple fibre and polyester filament yarn has been reduced from 16 per cent to 8 per cent.

The cess on crude oil production has been increased from Rs 1800 per metric tonne to Rs 2500 per metric tonne. The government has also increased service tax from 10 per cent to 12 percent on exploration activities.

The government has reduced the custom duty on 10 anti AIDS and 14 anti-cancer drugs to 5 per cent and duty on certain life saving drugs, equipments and kits have been reduced from 10 per cent to 5 per cent.

Swedish telecom giant Erisson, for the first time in

India

, has launched its research and development facility and global service delivery centre in Chennai.

Car market leader, Maruti Udyog’s vehicles sales for February 2006, has declined by 5 per cent to 41,095 vehicles. Also, Mahindra and Mahindra (M&M) has reported a 3 per cent drop in sales of utility vehicles to 9,042 units in February 2006.

General Motors India has posted a 3 per cent growth in car sales to 1709 units in February 2006 and Honda Siel sold 2,200 cars, registering a 24 per cent growth over its sales in February 2005.

Among the two-wheelers, Hero Honda has clocked a 12 per cent jump in sales in February 2006 to 2.5 lakh units and Bajaj Auto sold 1.79 lakh two-wheelers, posting a 29 per cent rise over February 2005. TVS Motors sales gone up by 13 per cent to 1.08 lakh units in the period under review.

In the three-wheelers segment, Bajaj Auto’s sales grew by 40 per cent to 25,896 units in February 2006. The leader in the tractor segment, M&M has posted 17 per cent rise in sales to 6,655 units.

RPG Transmission Limited has secured an order worth Rs 110 crore from Power Grid Corporation of India Limited.

Old age pensions are granted under the National Social Assistance Programme (NSAP) to poor persons above the age of 65 years at Rs.75 per month. Recognising its inadequacy, it has been proposed in the budget 2006-07 to increase the pension to Rs. 200 per month. For this, Rs.1,430 crore including some additional funds, if required, will be provided during 2006-07. The Finance Minister has also urged the state governments to make an equal contribution from their resources so that a poor pensioner would get at least Rs.400 per month.

Despite encouraging numbers, industrial unrest in Indian companies have risen with over 25 cases reported in the last six months, with almost half of them resulting in a temporary shut down in manufacturing activity. The major companies which has faced strikes in the past six months are Grasim Industries, JCT, Gujarat Ambuja, ACC, Crompton Greaves and NRB Bearings including the recent strike of 400 Toyota Kirloskar workers and a protest of Honda Motor workers, which took violent turn in July 2005. Even though the reasons behind strikes differ from case to case, it could be partly due to the fact that employees now want a greater share in company profits, for which the current labour laws are inadequate. There are number of similar instances of threatening of strikes by trade unions on various issues in 2005 like, EPF rate negotiations, airport privatisation and upcoming Sixth Pay Commission. A World Bank study titled ‘Doing Business’ released last year, has rated India amongst the countries with the most rigid labour laws, which essentially calls for urgent labour reforms.

The Indian telecom market, led by the robust growth in mobile subscriber base, is witnessing one of the fastest growth rates in the world in the last 2 years, adding over 1.5 million mobile subscribers a month. Reduction in tariffs and cost of handsets, which essentially makes the service very affordable for the user, has supplemented the growth of the Indian telecom sector. As a result the telecom density in the country has risen to 11.75 per cent at the end of February 2006, from 3.6 per cent in March 2001.

Presently, Indian telecom companies are offering one of the cheapest mobile tariffs in the world owing to strong competition among various players as well as due to simplification of telecom regulations.

The mobile sector alone has been growing rapidly and has emerged as the fastest growing market in the world. Currently of a size nearing 70 million (GSM and CDMA), this sector is expected to reach a size of nearly 200 million subscribers by the end of 2008.

Consolidation is picking up in the Indian telecom sector as the government has eased the rules regarding inter circle and intra circle mergers. This has led to a slew of mergers and acquisitions in the recent past within the domestic players as well as there were acquisitions by international players in the domestic market. Also as the sector is moving closer to maturity, further consolidation is a reality and this will lead to the survival of more profitable players in this segment.

1) Bharat Nirman Project to give telephone connectivity to the remaining 66,822 villages through BSNL;

2) More than 50 million rural connections to be rolled out in the next three years.

3) A provision of Rs 15 billion for Universal Services Obligation Fund in 2006-07;

5) Mobile telephone removed from the 1/6 criterion for filing income-tax returns.

7) Customs duty exemption for specified telecom network equipment and parts thereof, if imported by TSPs, extended beyond March 2005 without any specified time limit.

8) Custom duty on optical fibres and optical fibre cables reduced from 20 per cent to 10 per cent.

9) Customs duty and CVD exemption on parts, components and accessories of mobile handsets including cellular phones continued.

INFORMATION TECHNOLOGY

With the spread of information technology and IT enabled services, the government now wants to make

India

a preferred destination for the manufacture of semi conductors and other high technology IT products including wafer, flat LCD/ Plasma panel displays and storage devises. The Ministry of Information Technology will shortly announce a policy providing details in this regard.

An excise duty at the rate of 12 per cent has been re-imposed on computers. Simultaneously, the government has fully exempted DVD drives, flash drives and combo drives from the purview of excise duty.

Packaged software sold over the counter will attract an excise duty of 8 per cent. However, customized software and software packages downloaded from the internet will be exempt from this levy.

The reduction in the peak customs duty rate from 15 per cent to 12.5 per cent is expected to lower the cost of imported raw materials and therefore benefit the domestic hardware industry.

*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.