Current Economic Statistics and Review For the Week 
Ended March 18, 2006 (11^th Weekly Report of 2006)

Theme of the week:

Retail Sector in India: Issues and Prospects*

Retail, according to Concise Oxford English Dictionary, is the ‘sale of goods to the public for use or consumption rather than for resale’. Retailing is derived from the French word 'retailier' meaning  'breaking bulk' and breaking bulk quantities into smaller sellable units. Usually, a retailer buys goods or products in large quantities from manufacturers or importers, whether directly or through a wholesaler, and then sales individual items in small quantities to the general public or end users. The world over the retail sector has grown rapidly with increasing sophistication and modernization of the life-style of households and individuals and with increasing globalisation of trade; India has begun to cater up rather astonishingly rapidly.

I  An Overview of Indian Retail Sector

The retail sector has helped in giving strong impetus to overall economic growth as a significant driver of the growth of services sector, which contributes as mush as 54 per cent of GDP. It has strong backward and forward linkages with other sectors like agriculture and industry through stimulating demand for goods and through mass marketing, packaging, storage and transport. Moreover, it creates considerable direct and indirect employment in the economy. Also, the consumers have benefited in terms of wide range of products available in a market.

Size of the Modern Retail Sector

The emergence of new formats and the evolution of modern retail in India has attracted attention in recent years. [The data sets published by different authorities are not strictly comparable as they are based on surveys, but they give some idea of the trends and prospects.] The retail sector, currently, is said to contribute 10 per cent of India’s GDP (Confederation of Indian Industry), and is expected to grow at a robust rate of 36 per cent per annum by the end of 2008 (Associated Chambers of Commerce and Industry of India, ASSOCHAM). This growth would expand the size of the market to over Rs 14,79,000 crore from its current level of Rs 5,88,000 crore. The Indian retail market is estimated at Rs 9,300 billion and is expected to grow at a compounded rate of 30 per cent over the next five years (Retailers Association of India). Moreover, the retail sector employs over 7 per cent (21 million) of the national workforce (Aggarwal, 2000), the second only to agriculture. The retail density more than doubled between 1978 and 1996 and the number of outlets per 1000 people at an all India level, increased from 3.7 in 1978 to 5.6 in 1996. For the urban sector alone, the shop density increased from 4 per 1000 people in 1978 to 7.6 per 1000 people in 1996 (Venugopal, 2001). Because of their small size, Indian retailers have very little bargaining power with manufacturers, unlike in the case of retailers in developed countries, (Sarma , 2000).

Structure of Indian Retail Sector

The retail sector is classified broadly into two:

Organised Retail Sector and, Unorganised Retail Sector

The organised segment is mainly characterized by typically large number of retailers, greater enforcement of taxation mechanisms and better labour law monitoring systems. It is not just a stocking and selling, but is more about efficient supply chain management, developing vender relationships, quality customer service, efficient merchandising and timely promotional campaigns. It, however, constitutes a very little share of at around 3 per cent (Rs 300 billion) of the total retail market. (In China 20 per cent of the retail is organized and in the ASEAN countries it is more than 40 per cent - Ministry for Commerce & Industry, February 2005) According to the Retailers Association of India, the share of organised sector to the overall retailing market in India is expected to grow from 3 per cent to 20 per cent in the next 10 years. The KSA Technopak’s estimate is that by 2005, the organised retail sector would be employing in excess of 2,50, 000 individuals directly and perhaps 8-10 times as many indirectly in the supply chain.

The organised retailing has been successful in metropolitan cities so far, more so in the south and west India . It is expected that the tier II cities would take another 5 years to absorb modern retailing opportunities. Moreover, the case for Indian retailers to explore rural markets is also strong due to the size of rural population and agricultural income growth in last couple of years. A clear indicator of this potential is the share of rural market across most categories of consumption (Table 1 as shown below)

The unorganised sector, on the other hand, which represents 97 per cent of the total retail market is mainly characterised by typically small retailers, more prone to tax evasion and lack of labour law supervision. India is one of the largest unorganised retail markets in the world and more than 96 per cent of the retailers work in less than 500 sq ft of area. 

Components of Retail Sector

The major components of the retail sector are:

Food and Grocery, Fast Moving Consumer Goods (FMCGs),  Consumer Durables, Apparel, Footwear and leather, Watches, Jewellery, and Health and Beauty

The anatomy of the retail market has shown that the clothing and textiles constitutes 39 per cent of the organised retail pie, followed by food and grocery, which accounts for 11 percent of the total retail market. 

However, according to the survey conducted by KPMG for Federation of Indian Chamber of Commerce and Industry (FICCI), among these, the food and grocery is expected to witness the fastest growth followed by clothing as the second-fastest growing segment.

Key Players in the Retail Sector

The main players in the sector are classified as big corporate houses, dedicated brand outlets and multi-brand outlets. Some of the market leaders are:

Corporate Houses: Tatas (Tata Trent), RPG Group (Food World, Health & Glow), ITC (Life Style), Rahejas (Shoppers’ Stop), Hiranandani (Haike)

 Dedicated Brand Outlets: Arrow, Nike, Reebok, Zodiac, Louis Phillip etc.

Multi Brand Outlets: Vijay Sales, Apana Bazar, Viveks etc.

Manufacturers/ Exporters: Pantaloons, Bata, Weekender etc.

Among these, the formats like supermarkets (eg. Food Bazaars) have the highest potential for growth in India followed by hypermarkets (eg. Big Bazaar, Spencer’s).

Rural-Urban Share in Retail Sector

A distinctive feature of organised retailing in India is that it is largely an urban phenomenon. Organised retail has been more successful in metros and cities, more so in the south and west of India . The reasons for this regional variation range from differences in consumer buying behaviour to cost of real estate and taxation laws. Nonetheless, the case for Indian retailers to explore rural markets is strong. Factoring the size of the rural population and agricultural income growth in rural India , the rural market is certainly an opportunity for retailers with an innovative retail proposition. A clear indicator of this potential is the current share of rural market across major categories of consumption.

III Growth and Future Prospects

With the economy growing at a robust rate at near 8 per cent, the retail sector has also been witnessing notable growth due to an unprecedented consumption boom. The multiple factors driving this boom are: 

First, favourable demography with roughly 60 per cent of the total population below 30 years of age group.

Higher disposible incomes of young middle class consumers due to employment in IT, management and increasing number of working women,

 Change in consumption pattern with high aspiration levels. The AC Nielsen Online Omnibus Survey 2005 has rated India in the highest category of Aspiration Index (especially in consumer durables segment) in Asia along with China , Indonesia and Thailand . 

Easier consumer credit with low interest rates and,

Aggressive marketing by companies

 A notable growth in the retail sector is characterised by the performance of various retail segments:

Growth in Major Retail Segments

Apparel Industry

The robust performance of an apparel industry has been largely an outcome of a buoyant growth of the textile industry. The Indian textile industry has increasingly benefited since the post-quota regime [The multi-fibre arrangement (MFA), which governed global trade in textiles and clothing since 1974, came to an end in December 2004)] in terms of higher textiles export, especially due to the demand from UK and US retailers. Though, according to Directorate General of Commercial Intelligence and Statistics (DGCIS), the textiles and apparel exports have decelerated in 2005, according to the import data from US and UK , the exports have grown by 15 per cent in 2005 to about US $ 15 billion. Nevertheless, currently the overall apparel market is worth Rs 88,000 crore and though the share of branded segment may be limited, is growing at a healthy 25 per cent. Moreover, in the home textile market, India currently exports about Rs 21,000 crore of home textile products to the US alone and the share of domestic market is about one third of it. 

(ii) Food and Grocery

The food industry is the second largest growing industry after the clothing segment. According to the FICCI study, the size of the food and beverages industry is Rs 3,58,000 crore and it is expected to grow between 8 to 8.5 per cent in value terms during 2005-06. The highest growth is expected in the semi-processed or readymade food segment, which is estimated, to grow by 22 per cent. Other segments, which are expected to expand rapidly, are fruit juices, pulp and concentrates (18 per cent), followed by sauces (17 per cent) and branded milk products (15 per cent). The FICCI has urged the government to have pro-active approach for helping the industry to achieve the lower cost, quality improvement and better performance in the competitive environment.

(iii) FMCG (Fast Moving Consumer Goods)

In the last couple of years, the FMCG segment has grown at a rapid pace, especially due to increasing number of big FMCG outlets like Big Bazaar. According to the AC Nielsen India study, the Rs 48,000 crore FMCG industry grew by 5.3 per cent in value terms in 2005 over the previous year. A rise in food and personal care categories is fuelling this growth in value terms, with biscuits growing at 13.8 per cent, shampoos by 17.5 per cent as against 9.8 per cent and 8.6 per cent, respectively, registered in 2004.  Interestingly, the FMCG growth (in value terms) in rural markets has far outpaced the sector’s growth in urban markets during April-December 2005. The products, which have shown significant growth in rural markets, are toothpaste, hair oils and shampoos. Shampoo sales, for eg., in rural areas have gone up by 30.8 per cent as compared to just 11 per cent in urban areas. The reasons attributed to such buoyant growth in rural markets are highly saturated urban markets (tier I and II cities), successive good monsoons and a resultant growth in farm income coupled with increasing awareness towards better lifestyle in rural areas.

(Please note that the data for ‘food and grocery’ and FMCG market are not comparable due to the overlapping nature of these industries and different sources mentioned)

(iv) Consumer Durables

The size of the Indian consumer goods industry is at around Rs 20,000 crore. After three years of buoyant performance, the consumer durables industry has shown a moderate growth (in terms of production) of 13.6 per cent during the period April-January 2006 as compared to 14.8 per cent over the corresponding period in the previous year (Ministry of Statistics and Programme Implementation). According to the study by  Investment and Credit Rating Agency (ICRA),  based on recent trends, the Indian colour television (CTV) market is estimated to increase from 8.3 million number of units during 2003-04 to 10.1 million during 2005-06. Similarly, the refrigerator and washing machine markets are also expected to increase by 13.5 per cent and 14.2 per cent, respectively, in the same period.

Investment in Indian Retail Sector

According to the KSA Technopak Retail Summit 2005, investment in the Indian retail sector is estimated at Rs 2000 crore to Rs 2,500 crore in the next two to three years and over Rs 20,000 crore by the end of 2010. Large Indian corporate houses like Tata, Reliance, Raheja, ITC, Bombay Dyeing, Murugappa Group and Piramal Group have continued to show interest in huge investments in organised retailing. The buying volumes for many of these players are in the range of Rs 1000 to Rs 2000 crore per year with the plans to increase it to Rs 10,000 to Rs 15,000 crore within the next three four years. Similarly, foreign investors and private equity players are also firming up plans to identify investment opportunities in the Indian retail sector.

The medium to long-term prospects for the Indian retail industry appears positive. The growth prospects for individual items, would, however, depend on specific demand drivers.

IV Key-Challenges in Indian Retail Market

  Given the robust growth observed in various retail segments, the current scenario of the Indian retail sector is certainly bright and promising. However, there are number of issues which need attention:

1. Foreign Direct Investment (FDI)   

The most vital ongoing policy issue in the retail sector is one of the foreign direct investment (FDI). Prior to 1997, there were no regulations restricting the entry of foreign players. The two major companies, namely Nanz and Spencers were granted permission to sell products directly to customers. In 1997, it was decided that FDI would not be allowed for mere trading as it would lead to the outflow of foreign exchange, drive out the unorganised retailers from business and increase unemployment. Recently, the government has notified the guidelines for FDI in single brand by stating that 51 per cent FDI would be allowed only in those single brand products that are branded during manufacturing and sold under the same brand internationally. (At present the brands are available through a network of local franchisees.) This rules out third-party sourcing of the kind that, say, Bata does in the case of shoes. The rationale behind this move is generating greater employment and encouraging multinationals to set up manufacturing bases in India .

This move by the government has raised number of dubious issues like adverse impact on small shops (kirana stores) in terms of possible loss of jobs in unorganised retail sector and lack of business coupled with reduced requirement of middlemen. According to FDI proponents, some of the major benefits of opening up the retail sector are:

Employment generation,

Competitive environment resulting in price and quality advantage to consumers,

Expansion of manufacturing base and foreign investment,

Reward to farmers if direct purchase of produce from farmers and,

Better standard of living to meet rising aspiration levels of middle and higher-middle income class.

Given these, the FDI in retail sector, is expected to benefit the economy considerably. The apprehensions raised by some of the industry experts regarding the job displacement is expected to be compensated by creation of jobs by allied sectors such as food-processing industries and there is no harm in jobs moving from one sub-segment to another sub-segment. It is said that the retail industry has the potential to create 8 million jobs. Moreover, as far as the small shops are concerned, the advantage of convenience that they hold over the far-located big malls will always remain. Similarly, personal relations with the small shop owners had been found to be advantageous over the period of time.  What is more, comparing internationally, almost all major developed and developing countries have allowed FDI, whether with restrictions such as minimum capital requirements, sourcing conditions etc or with FDI in a phased manner. For e.g. China has opened retail sector partially in 1992 and allowed 100 per cent FDI only in 2004. Thus, for a decade, it allowed only one foreign outlet per province. It seems that the government of India too, can also open the retail sector in a phased manner. Instead of over-protecting ‘mom-and-pop’ stores (which are fewer than both producers and consumers), especially when they are not at risk in terms of survival, the government may continue with allowing FDI in a phased manner.   

2. Unbalanced Growth

Most of the modern retail opportunities are in the urban areas and the rural retail potential has remained untapped. While there is a large potential in rural areas, fragmentation and cost of market access are real deterrents. No doubt that rural retailing is gradually gaining grounds with the explorations by the corporates like ITC’s Choupal Sagar (rural hypermarket), HLL’s  Shakthi and Mahamaza. However, the pace at which the retail sector has been expanding in rural areas should have been much more faster. The higher purchasing power in rural and semi-urban areas has significantly modified peoples’ lifestyle; for e.g. the sachet phenomenon is a thought to reach to the bottom of the pyramid. Lot of people in rural India are just not willing to buy a whole bottle of shampoo, but that doesn’t mean they won’t buy it. Thus, the key is in slicing the relevant customer segments and developing appropriate formats. If the specific needs of consumers are recognised, there would be a considerable market expansion, which would divert a part of retail business to rural areas and help in reducing rural-urban imbalance.

Real Estate: Availability and High Costs

The most crucial infrastructural problem of modern retail development is the availability of quality retail space in India . The preferred form of retail real estate acquisition is through long-term leases in India . Few retailers prefer a mix of owned and leased real estate space and some own it. A pressing issue today is the cost of commercial property, especially in the urban and semi-urban areas, which is expected to increase due to the rapidly rising demand.

Currently, the total retail mall space, as shown in the chart above, is 22 million sq.ft. and is expected to be at around 90 million sq. ft. by the end of 2007, a huge increase of 309 per cent. The projected share of the mall space across the four Indian zones is shown in the chart below:

Finance Related Issues

According to the findings of FICCI, it is relatively easy to raise finance for retail business in India as compared to other countries, provided the business case is sound. The analysis of retailers indicated that debt contributes to between 15 to 40 per cent of the sources of funds for retailers in India , equity financing is the most preferred mode followed by self-ownership. However, it is generally a very time-consuming and complicated process. Moreover, according to KPMG Retail Survey (2005), the cost of retail capital is also quite competitive in India . Therefore, easy and quick availability of finance at competitive rates is a key enabler for growth in retail. Retail space availability and costs are the issues to which probably the only answer is the diversification of retail business across the country in stead of concentrating on already saturated markets.

The Retail Supply Chain: The Weak Link  

The key imperative facing retailers in India is a robust and scalable supply chain. One of the measures of efficient operations is the inventory turns ratio. The inventory turnover is a ratio that shows the number of times the inventory of a firm is sold and replaced over a specific period. The US retail sector has an average inventory ratio of about 18. Similarly, the best global retailer like the ‘7-Eleven’ has over 50 turns of inventory.  Most Indian retailers KPMG surveyed have inventory turns levels between 4 and 10. Another indicator of an efficient supply management is the stock availability on the retail shelves. The global best retailers achieve more than 95 per cent availability of all products on the retail shelves translating into a stock out of level of less than 5 per cent. The stock out of levels among Indian retailers surveyed ranged between 5 to 15 per cent.  Thus, looking at the inventory turns and stock availability status, retailers in India clearly need to augment their operations. 

Apart from these indicators, there is fragmentation of supply chain due to sales tax laws, which lead retailers to prefer state level procurement and storage rather a national warehousing strategy. In some cases, such decentralized strategy leads to excess holding of inventories. Nevertheless, post full implementation of value added tax (VAT) and removal of central sales tax (CST), is expected to streamline the supply chain.

Moreover, not many retailers in India have long-term purchase agreements with suppliers. From time to time, orders are placed to leverage the various trade schemes that manufacturers come up with. This leads to retailers taking larger inventories at the time of good trade promotion schemes, whereas a giant successful retailers tie up with manufacturers to develop ‘Every Day Low Price’ strategies where prices and discounts are kept uniform throughout the year.  Retailers in India also face constraints due to regulations like APMC (Agricultural Produce Market Committee) Act, which prohibits transactions outside the ‘mandi’ system and prevent large volume, direct purchases of fresh produce from farmers. Nevertheless, the model Act, named as State Agricultural Produce Marketing (Development and Regulation) Act 2003, sought to amend the APMC Act  redefines the role of present APMC to promote alternative marketing system, contract farming and direct dealings with farmers.

Lack of Integrated Management

Operations of retailers and suppliers are not integrated in India . Most of the Indian retailers still have manual information exchange with their suppliers. In developed countries, retailers practice ‘Vender Managed Inventory’ (VMI) systems, where the supplier has access to the point of sales data of the retailer and plans automatic replenishments responding to the stocks availability at the retailer. For e.g. The Tesco which has implemented the technique called ‘milk-runs’. Interestingly, if such efficient systems are being implemented in auto and auto component industry in India , why not in retail?  The retailers can leverage such expertise available to implement efficient supply chain management techniques.

Supplier maturity in terms of adherence to delivery schedules and delivering the quantity ordered is an issue in India . In this context, some of the multinational retailers like McDonalds, operating in India , had spent significant time and efforts to augment the capability of local suppliers.

Dearth of Skilled Manpower

Retailing is a highly labour-intensive sector. As mentioned above, India employs 7 per cent of the workforce in retail as compared to 10 to 11 per cent of the workforce employed in the developed economies. According to the survey conducted by FICCI and KPMG, there is a paucity trained personnel suitable for retail sector, both at store as well as managerial level. Given the working population of 337 million (NSSO 55^th round, 1999-00 on current daily status), there should be no manpower shortfall in India . However, the gap lies in finding people with the right skill-sets like, customer orientation and selling which are critical. According to the study by Images Retail (a magazine on Indian retail industry), this gap in the managerial cadre is narrower since managers from industries like FMCG are able to learn and adapt to the demands in the industry quickly. Therefore, proactive training is a key imperative for store level employees. Some of the retailers like RPG and ITC have taken steps in this direction by starting formal retail management training facilities in some cities.     

Summing up

Given the developments and prospects, the Indian retail sector is in its nascent stage of evolution. While there are obstacles, there are clear opportunities in modern retailing in India . There are many lessons that India can take from other countries, which have moved along the path of retail evolution. The retail sector has proved to be of immense significant from macro-economic point of view. The sector’s capability to give strong growth momentum by creating multiplier effects on other sectors is not in dispute. It is now necessary to cautiously expand and develop the sector, as the government, at present, has done by permitting partial FDI in the sector. Given the scope, the retail sector is certainly expected to fetch the long-term economic benefits for the country.

* This note is prepared by Gauri Ranade

Highlights of  Current Economic Scene

AGRICULTURE     

As per the data issued by Indian Tea Association (ITA), tea production in the country during 2005 has registered a marginal growth of 4 per cent. The 1.6 per cent fall in the production in southern parts to 227 million kg in 2005 has been offset by an increase of 5.8 per cent from northern parts to around 701 million kg in 2005. However, the industry has suffered losses on the export front with the exports falling by 5 per cent to 187.6 million kg in 2005 apart from experiencing drop in average price realisation (around 3 per cent to Rs 90.49 per kg) as well as in total export earnings (around 8 per cent to Rs 1697.67) in 2005. Imports of tea have also reduced substantially by 46.5 per cent to touch 16.47 million kg in same period causing the net exports to surge upward from 166.8 million kg in 2004 to about 171 million kg in 2005.

As per the data from Rubber Board, the production of natural rubber in 2005-06 is likely to touch 7.86 lakh tonnes, recording a growth of 4.9 per cent over the previous year, exceeding the its earlier growth forecast of 4 per cent. This growth has been attributed to rising prices and conducive weather conditions that induced adoption of better farm practices by the farmers, more tapping and yield. Rubber production during April-February 2005-06 has grown by 5.1 per cent to stand at 7.4 lakh tonnes. Pertaining to the continuous demand for rubber in the international market, the rubber exports from the country have recorded a rise of 43.4 per cent to reach 61,493 tonnes over the period of one year.

The first instalment of the imported wheat (25,000-30,000 tonnes) is expected to arrive in the country by the end of March 2006. Following this, the wheat growers have apprehended that the government may go slow on wheat procurement. In the meanwhile, wheat procurement in the ensuing rabi marketing season (April-September, 2006-07) in the country is going to be delayed. It is about to begin 5 days late that is on March 20, 2006 in Rajas than and Madhya Pradesh and from April onwards in other states, as state governments are arranging for the proper infrastructure for the smoother execution of the process.

A US trade official has decided to hold talks on the contract specification for the import of wheat to have clear picture about India ’s requirements. Expecting the need for the contract specifications to be less tedious and less complicated, the US delegation has reiterated that the rigid tender norms have caused India to pay a premium of $20 per tonne for the wheat it was importing from AWB Ltd.

Andhra Pradesh has achieved a record output in shrimp cultivation so far in the financial year 2005-06The harvest of scampi (fresh water) and tiger prown (both fresh and brackish water) has seen output little above 1 lakh tonne. About 30,000 farmers in the state have taken up shrimp culture and the acreage has stood at 70,000 hectares.

The unseasonal rains have adversely affected thousands of mango farmers in Vasai, Virar and Palghar areas making the cultivators skeptic about the crop production, quality and yield. Losses suffered by the farmers have aggravated since the orchards were not covered under the insurance schemes and the farmers would themselves have to bare the losses. Unseasonal rains accompanied by stormy winds have caused substantial damage to mango and grape farms in Nasik and surrounding areas. Farmers, who have stored their onions and wheat, have suffered heavy losses.

National Centre for Medium Range Weather Forecasting (NCMRWF) is expecting the normal monsoon in 2006. This prediction is based on the preliminary meteorological observations, which have indicated the development of La Nina (phenomenon representing unusually cold temperatures) in the equatorial Pacific Ocean and occurrence of which have always followed by good rains in the past.

The government has ordered the conversion of around 0.3 million tonnes of unsold on-levy free sale sugar (29,427 tonnes) of 22 sugar mills of Uttar Pradesh and Uttaranchal into compulsory levy sugar. This action has been taken in the background that some sugar mills were reporting less quantity of free sale sugar, which was lower than their monthly quota.

As per the fact-finding committee of Planning Commission, the irrigation backlog as on April 01, 2005 for Vidarbha region in Maharashtra has amounted to Rs 3045 crore a 4 per cent and it has stood at Rs 4330 crore for the state as a whole. The region has inadequate irrigation facilities with the irrigation network covering only 11 lakh hectares against the targeted 37 lakh hectares.

INDUSTRY

Chemicals

The government has plans for putting urea movement under full control regime, thus reversing the liberalisation process initiated by the National Democratic Alliance government in 2003. Under the existing system urea is 50 per cent decontrolled. The idea, if implemented, will cost the exchequer Rs 100 crore as an increase in additional freight subsidy, at Rs 100 per tonne on the 100 lakh tonnes of decontrolled urea capacity, which will be brought under control. The move will also do away with disparity of freight rates under the Essential Commodity Act (ECA). The non-ECA allocations one would get Rs 100 less a tonne, which would eventually strengthen the distribution network. The existing rates are Rs 400 a tonne for ECA supplies and Rs 300 per tonne the non-ECA category.

Small Scale Industries

Following the Budget announcement of finance minister that 180 of the 506 items have been identified for de-reservation this year, the government will dereserve the majority of items being produced in the drugs and pharmaceutical and auto component sectors from the list of items reserved for small-scale industries (SSI). At present, 33 items are reserved for the SSI sector under the head, organic chemicals, drugs and drug intermediates. As per sources, barring one or two, most of these would be de-reserved. Similarly, a majority of the 67 items in the other chemicals and chemical products; and 36 under the auto components and ancillaries and garage equipment would be de-reserved. Almost all the 19 items in the paper products category may be de-reserved with the ministry likely to reduce the reserved items in the mechanical equipment (137 items) and plastic products (53 items) categories. Post-dereservation, there would still be 326 items under the reserved list with even fewer categories. Last year the government had de-reserved 108 items.

INFRASTRUCTURE

Power

The public investment board has cleared six transmission projects worth Rs 8,585 crore, of which, fully independent private transmission companies will implement two projects worth Rs 1,500 crore. The projects passed by the board are: the East-West transmission corridor worth Rs 803 crore, strengthening of the regional transmission system for Rs 5,221 crore and strengthening of the Northern region transmission system at Rs 721 crore. A transmission system to evacuate power of hydro electric project Parbati -III at a cost of Rs 557 crore and a transmission system to evacuate power of the Gandhar project of NTPC Ltd in the northern region at a project cost of Rs 453 crore have also been approved. A system to evacuate power of the NTPC's Kawas project in the western region at a cost of Rs 830 crore has also been given the go-ahead.

Ports

The government has earmarked Rs 3,500 crore for Vizag port under the National Maritime Development Programme (NMDP). Out of this, Rs 1600 crore would be spent on developing railway connectivity and Rs 600 crore would be generated through budgetary allocation, another Rs 600 crore through internal accruals. Rs 900 crore would be generated through private sector investment in port related projects.

INFLATION

The annual point-to-point inflation rate based on wholesale price index (WPI) has gone down to 4.29 per cent for the week ended February 25, 2006 from 4.34 per cent during the previous week. The inflation rate was at 5.06 per cent in the corresponding week last year.

The WPI in the week under review has declined by 0.1 per cent to 197 from 197.1 for the previous week (Base: 1993-94=100). The index of primary articles’ group (weight 22.02 per cent) has declined considerably by 0.4 per cent to 194.5 from the previous week’s level of 195.2, due to a significant decline in the price index of both, food and non-food articles by 0.5 per cent and 0.2 per cent, respectively. The index of food articles has gone down to 195.6 from 196.5 in the previous week, mainly due to lower prices of eggs, fish-marine and fruits and vegetables. Similarly, the index of non-food articles has also gone down to 176.4 from 176.7 for the previous week, due to lower prices of copra, sunflower, safflower and raw tobacco.  The index of ‘fuel, power, light and lubricants’ group (weight 14.23 per cent) has remained unchanged at 311.9 as in the previous week. The index of ‘manufactured products’ group constituting the maximum of 63.7 per cent of total weight, has risen by 0.1 per cent to 172.2 from the previous week’s level of 172.1, mainly due to increased prices of textiles, ‘chemical and chemical products’,  ‘non-metallic mineral products’, ‘machinery and machine tools’ and base metals.

The latest final index of WPI for the week ended December 31, 2005 has been revised upwards; as a result both, the absolute index and the implied inflation rate stood at 197.1 and 4.56 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 Economic Survey 2005-06, the annual point-to-point inflation rate is expected to be at around 5 per cent at the end of March 2006.

BANKING

Finance Minister is likely to face stiff opposition from the public sector banks on the government’s proposal to provide short-term credit to farmers at 7 per cent. Bankers fear that farm lending at 7 per cent will only worsen the credit risk profile of banks, as it is much lower than the banking industry’s average yield on advances of about 8.5 per cent. The government plans to implement the 7 per cent farm credit scheme through a special refinance package via Nabard. Banks normally do not avail of refinance from Nabard, they tap the refinance window only in times of liquidity crunch. Farm credit is expected to increase to Rs 1,41,500 crore by the end of March 2006 from Rs 1,25,309 crore a year earlier. To compensate the deficit on agricultural lending, banks will have to increase lending rates of other segments. Bankers said the government should go in for direct subsidy in interest rates to farmers as it has done in the case of crop loans in the year 2005-06 for kharif and rabi seasons. In addition, the decision by the finance ministry to omit Section 10 (23G) has also come in for sharp criticism as it comes amidst government’s plans to substantially increase investments in the infrastructure sector. With the removal of the section, interest earned on advances and capital gains from equity support to infrastructure projects have now become taxable. Bankers said the removal of tax exemptions for exposure to the infrastructure sector will compel banks charge about 50 – 100 basis points higher on loans to infrastructure projects.

In a meeting with the central bank, the banks pointed out that the liquidity situation might remain tight in the coming fiscal due to higher government borrowings. On the other hand, deposit growth is slow in comparison to the credit growth. Therefore to meet the growing demand of funds, the banks may need to borrow dollar funds from overseas and convert them into rupees. The swap cost involved in the conversion of the dollars into rupees works out cheaper than borrowing rupees from the domestic market. However, the RBI seems to have not been convinced of the fact that borrowing funds from overseas works out cheaper to domestic funds especially at a time there is global tightening of the interest rates.  Both the international benchmark - London Inter bank bid offer rate (LIBOR) and premium on forward dollars are on a rise. Incidentally, banks have also pointed that foreign exchange inflows might not be very robust this year with interest rate firming up elsewhere.  According to bankers, till the time interest rates stabilise globally, there is arbitrage opportunity to bring in overseas dollars and convert them into dollars.  

PUBLIC FINANCE

The government and Asian Development Bank (ADB) have tentatively finalized the ADB’s country strategy program for 2006-08. The ADB will make efforts to increase its lending to India from US $ 2.25 billion in 2006 to US $ 2.45 billion in 2007 to US$ 2.65 billion in 2008 should there be demand for it from the states and other executing agencies. The loans are in sectors identified by the Government of India to eradicate poverty through infrastructure-led growth. Nearly 77 per cent of the three-year program focuses on core infrastructure projects including transport such as national highways, state roads, rural roads, railways and urban transport; urban development such as water and sanitation, city development, municipal reform; irrigation; and energy such as power sector reforms, transmission and distribution, hydropower.

Clause 56 of the Finance Bill, 2006 proposes to insert a new condition, in addition to the existing ones, which has to be fulfilled by a recognized provident fund of any establishment to be eligible to get recognition under the Income-tax Act. The new condition is that the fund, set-up by an establishment, should be recognized under the Employees’ Provident Funds and Miscellaneous Provisions (EPF & MP) Act, 1952 and such establishment should be exempted from the operation of all or any provisions of any scheme referred to in Section 17 of that Act. As a result, all new funds of any establishment will get recognition under the Income-tax Act only if they fulfill this new condition in addition to all existing conditions prescribed under the Income-tax Act.

The issue of disinvestment of 10 per cent equity of Neyveli Lignite Corporation Limited out of the government's holding is under consideration of the government. A final decision is yet to be taken in this regard according to  the Minister of state for coal in a written reply in the Rajya Sabha.

Services provided in relation to Automated Teller Machine (ATM) operations, maintenance or management is not leviable for use of ATM by the card holders.  Service tax on the proposed taxable service is leviable only if the services provided are in relation to operations, maintenance or management of ATM and are outsourced by banks to third parties. Third parties who provide services to banks in relation to ATM operation, maintenance or management are covered under the category of the proposed service. When ATMs are operated, maintained or managed by banks on their own, service tax liability does not arise. It is, therefore, clarified that the proposed service under Section 65(105)(zzk) of the Finance Act, 1994 will not result into any additional service tax liability on the users of ATMs.

The annual plan for Meghalaya for the year 2006-07 has been finalized at a meeting between deputy chairman planning commission and the chief minister of Meghalaya. The plan size has been agreed at Rs 900 crore. This includes onetime additional central assistance of Rs 51 crore for projects of special importance to the state including a project for management of bamboo flowering.

FINANCIAL  MARKET

Capital Markets

Primary Market

Adhunik Metaliks Limited will be tapping the primary market on March 13, with its IPO issue offering a price band of Rs 37 to Rs 42 per equity share. The issue closes on March 17.

Rohit Ferro-Tech Limited tapped the market with its public issue of 1,69,47,667 equity shares of Rs 10 each for cash at a premium of Rs 20 per equity share. The issue closes on March 11.

Solar Explosives Limited tapped the market on March 9 with a public issue of 44,00,000 equity shares with a price band of Rs 170 to Rs 190. The issue closes on March 13.

Uttam Sugar Mills Limited will be tapping the market on March 16, with its public issue of 40 lakh equity shares offering a price band of Rs 290 to Rs 340. The issue closes on March 21.

Secondary Market

Markets continued its post-budget bull run and the sensex gained 169.73 points to end at 10765.16 and S & P CNX Nifty rose by 36.55 points to settle at 3183.90.  However, this was followed by high volatility with buying and selling on alternate trading session. Among the sectoral indices, all the indices ended in the positive territory except for the consumer durables index, which declined by 0.46 per cent. The biggest gainer was the BSE CD index with over 5.4 per cent gain, followed by BSE IT with over 2.18 per cent gain. Meanwhile, the sensex P/E ratio as on March 11, stood at 19.77.

On March 8, the sensex witnessed its highest single day loss since September 22, 2005 to end the day at 10,508.85, down by a massive 216.82 points. This fall  can be attributed to the FIIs turning net sellers to the tune of Rs 1600 crore in the derivative segment in index futures alone, they were net seller to the extent of Rs 1,488.32 crore. However, in the cash market they were net buyers to the tune of Rs 222.50 crore.

The FIIs have pumped in over $ 3 billion in the current calendar year till date in the cash market. While in the month January they had pumped in only US $ 737.50 million, in February they were more aggressive and pumped in US $ 1.3 billion. Meanwhile, during the said period, the number of FIIs registered with Sebi has increased to 870 as on March 9.

As per the latest shareholding pattern available as on December 31, 2005, the FIIs holdings in the sensex companies stands at 29.41 per cent of the total free float equity capital of the BSE’s benchmark index constituent.

During the period March 1 to March 9, the mutual funds have been net buyers in the equities to the extent of Rs 963.04 crore with purchases worth Rs 4528.17 crore and sales of Rs 3595.13 crore.  Meanwhile, during the same period, FIIs were also net buyers in the cash market to the tune of Rs 3115.30 crore with purchases worth Rs 16890.60 crore and sales of Rs 13775.30 crore.

Derivatives

During the week, the NSE’s F & O segment, the total turnover stood at Rs 174914 crore with an daily average turnover of around Rs 34983 crore. For the same period the turnover in index futures stood at 47667 crore and that of stock future stood at Rs 169323 crore.

Government Securities Market

Primary Market

During the week, RBI has mopped up Rs 964.99 crore through 91-day treasury bill and Rs 500 crore through 182-day treasury bill under its regular auction. The cut-off yields for the 91-day and 182-day treasury bills were 6.6462 per cent and 6.7154 per cent, respectively.

Meanwhile, the government has issued 7.40 per cent-2035 paper to RBI for a notified amount of Rs 10,000 crore on a private placement basis at a price of Rs 95.72. The government has also issued ‘7.33 per cent Oil Marketing Companies Government of India Special Bonds, 2009’ for Rs 2,000 crore and ‘7.61 per cent Oil Marketing Companies Government of India Special Bonds, 2012’ for Rs 2,000 crore and ‘7.61 per cent Oil Marketing Companies Government of India Special Bonds for Rs 1,750 crore. These Special bonds were issued to three oil marketing companies to compensate them for under-recoveries in their domestic LPG and kerosene operations during the current financial year. The special bonds were issued at par to Indian Oil Corporation Ltd for Rs 3,449.07 crore, Bharat Petroleum Corporation Limited for Rs 1,100.81 crore and Hindustan Petroleum Corporation Limited for Rs 1,200.12 crore.

Secondary Market

During the week under review, excessive covering ahead of the advance tax outflows, in addition to the shortage of cash in the banking system continued to pressurize the call rates. Consequently, the call rates rose to 6.7 - 6.8 per cent as against the previous week’s close of 6.5-6.7 per cent. During the week, the amount placed under the RBI’s repo window averaged to Rs 8,465 crore as against Rs 4,901 crore in the previous week. While, the daily average subscription at the reverse repo auction window fell to Rs 279 crore.

Moreover, the announcements by the government on a reassessment of its cash balance position that it would not undertake any further issuance of government dated securities during the fiscal 2005-06 offered some respite to the weak market sentiments. The yield on actively traded 8.07 per cent-2017 paper dropped to 7.37 per cent before closing at 7.40 per cent, down from its previous week’s close of 7.44 per cent.

Bond Market

UCO Bank has tapped the market with upper Tier II bonds amounting to Rs 300 crore. the primary issue of upper Tier-II bonds pegged at Rs 200 crore with an additional greenshoe option of Rs 100 crore.

Foreign Exchange Market

During the week, factors such as suspected RBI intervention, dollar rise in the overseas market and the mid-week domestic stock exchange fall by 2 per cent weighed down on the rupee. The rupee stood 0.4 per cent weaker at Rs 44.50 per dollar as against Rs 44.33 per dollar in the previous week. Moreover, the existing arbitrage opportunity in the non-deliverable forward market (NDF) also pulled the rupee down against dollar. In the forward premia market, the six-month annualised forward premia closed at 2.55 per cent as on March 10 as against 5.65 per cent as on March 3.

The RBI has, in a move to make foreign exchange market more accessible to the common man, allowed full-fledged moneychangers, urban co-operative banks (UCBs) and regional rural banks (RRBs) to undertake a wider range of transactions relating to release/remittance of foreign exchange for various non-trade related current account transactions.

Commodities Futures Derivatives

NCDEX will soon come out with daily contracts in four commodities, namely, gold, silver, chana and sugar. The exchange has approached FMC for approval of its contract structure.

MCX will, on March 9, launch futures trading in potato; initially trading will start in April and May contracts. April and May delivery contracts will be launched with 3797 as quality variety with deliverable size in the range of 40 mm to 80mm. the trading unit is 30 MT with tick size of 10 paise and initial margin of 6 per cent.

The International Sugar Organisation (ISO) in its report has stated that the global sugar production will fall short of demand this year by twice as much as initially expected, citing the declining stockpiles and growing demand in Russia as the reasons. The shortfall will be 2.225 million metric tonne in 2005-06.

NMCE is set to launch futures trade in copra from March 9. Initially, there would be three contracts and the quality would be based on the Agmark specifications of 6 per cent moisture and 64 per cent oil content for mechanized extraction.

On MCX, the potato futures saw voluminous growth even on the second day of trading. On the opening of the contract on March 9 a total of 776 trades with a value of Rs 17.05 crore and a volume of 25020 MT was registered, on the same day the open interest was 4920 MT. On the second day there has been a tremendous increase of 300 per cent in the turnover valued at Rs 51.42 crore and volume at 70530 MT. The open interest was higher at 10320 MT. April contract showed a growth of Rs 44 per quintal, whereas, the increase was Rs 42 per quintal in case of the May contract. The April contract closed at Rs 727.80 per quintal and the May contract closed at Rs 751.60 per quintal.

INSURANCE

IDBI has signed a memorandum of understanding (MoU) with Brussels-based banking and insurance firm, Fortis, for setting up a life insurance joint venture. IDBI and Fortis will now jointly decide on the third partner for the life insurance joint venture, as the RBI is against a single bank holding of 74 per cent stake in a life insurance venture. The Belgium financial group, Fortis considers the MoU as the first but important step to enter the Indian market. The high savings culture and low insurance penetration rates in India has attracted Fortis to India as it sees these factors as the reason for the fast growing insurance market.

CREDIT RATING  

Crisil has assigned ‘AAA/Stable’ to CitiFinancial Consumer Finance Ltd’s Rs 3 billion non-convertible issue and it has reaffirmed the ‘AAA/Stable’ and ‘P1+’ ratings assigned to the company’s another Rs 37.50 billion non-convertible debenture issue and Rs 7.25 billion short-term debt programme. The rating reflects CitiFinancial Consumer Finance India Limited's (CitiFinancial) 100 per cent ultimate ownership by Citigroup Inc. and the strategic importance of CitiFinancial to Citigroup Inc's India business plans.

Crisil has assigned ‘AAA/Stable’ to Rabo India Finance’s Rs 1 billion on-convertible debentures programme.  The rating is based on the company’s full ownership by, and strategic importance to, its parent Rabobank Nederland. The close linkage with parent company implies a strong economic rationale and moral obligation on part of Rabobank group to support Rabo India Finance.

Crisil has reaffirmed the real estate developer rating of ‘DA2+’ on Puravankara Projects Limited; the assigned rating indicates that the developer has a very good track record in executing real estate projects as per specified quality levels and transferring a clean title within the stipulated time schedules

Icra has assigned ‘LAA+’ rating to Rs 10 billion non-convertible debentures programme and existing Rs 35 billion capital gains bonds programme of Small Industries Development Bank of India (SIDBI). The rating reflects the support that SIDBI receives from government of India for its role as a nodal agency for the development of small and medium scale industries (SME) in India .

Icra has assigned and ‘LAA+’ rating to the Rs 3 billion subordinated bond programme of Indian Overseas Bank (IOB). The assigned rating takes into account the consistent growth maintained in credit over the past several years, the improvement achieved in its asset quality and bank’s improving core profitability.

Icra has reaffirmed the ‘LAAA’, ‘MAAA’ and “a1+’ ratings assigned to the Rs 10 billion long-term debt programme, fixed deposits programme and Rs 5 billion short-term debt programme, respectively of Bharat Heavy Electricals Limited (BHEL) .The reaffirmation of the highest credit quality ratings reflects BHEL’s dominant position in the power equipment industry, its healthy order book position and profitable operations, which combined with low gearing levels, have resulted in very favourable debt service coverage indicators

Care has reaffirmed the ‘AAA’ rating assigned to Emami Ltd’s (EL) proposed issue of long term debt of Rs 20 crore. The rating draw strength, inter alia, from EL’s long and satisfactory track record, reputed brands with valuable brand equity, high market share in some of its products, consistent growth, emphasis on market-oriented R&D, new product innovations, comfortable financial position, insulation from the intense competition in the FMCG sector by virtue of manufacturing ayurvedic products, opportunities for brand extension and good export potential

Care has assigned a ‘PR1+’ rating to proposed short-term debt (including commercial paper) programme of ACE Glass Containers Ltd. for an amount aggregating Rs 30 crore. The rating draws strength from ACE’s satisfactory track record under the new management, its dominant position in the container glass industry, broad product mix and diversified customer base, good clientele, growth in major user industries and comfortable financial position

Care has assigned an ‘AAA’ rating to the subordinate bond issue of Rs 500 crore of Oriental Bank of Commerce (OBC). The rating factors in OBC’s national presence, relatively good technology orientation among nationalized banks, healthy profitability, high provision coverage and good recovery & asset resolution initiatives leading to improving asset quality.

Care has reaffirmed ‘AAA’ rating for the secured bonds issues aggregating Rs 2462.9 crore of Nuclear Power Corporation of India limited (NPCIL). The assigned rating factors in NPCIL’s strategic role in India’s nuclear policy with 100 per cent government of India ownership, established track record of operating large nuclear power projects, sound financial position with low gearing and high interest coverage and improvement in profitability and liquidity position due to improvement in collection efficiencies.

Care has assigned an ‘AA’ rating to the proposed subordinate debt bond issue of IDBI Home Finance Limited of Rs 60 crore. The rating factors in the strength of the parent company IDBI Ltd. and its 100 per cent shareholding in IDBI Home Finance Limited.

Fitch has assigned ‘AAA ( Ind ) rating to HDFC Bank’s proposed subordinated debt programme aggregating to Rs 10 billion. Simultaneously, the agency has affirmed the ‘AAA (Ind)’ rating to the existing Rs 14 billion subordinated debt programme and ‘tAAA (Ind)’ rating to the fixed deposit programme, as well as F1+(Ind) to Rs 50 billion certificate of deposits programme.

CORPORATE SECTOR

Havells India has received an export contract of worth $ 10 million from Eaton Electrical Group for supply of domestic switchgear in the Asia Pacific region.

Siemens India and Siemens AG, Germany have secured a contract to develop a power transmission network, worth Rs 640 crore in and around Doha , Qatar . Work worth Rs 530 crore will be executed by Siemens India. The contract includes setting up of a five sub-stations of 220,132, 66kv.

Fortis healthcare is setting up a Rs 1000 crore comprehensive healthcare complex, Fortis International Institute of Medical and Biosciences, in Gurgaon, near Delhi .

Marico has acquired Hindustan Lever Limited’s hair oil brand ‘Nihar’ for Rs 216 crore.

Bombay Rayon Fashions Limited will be investing around Rs 87.8 crore for acquiring a garment unit at Navi Mumbai, increasing existing capacity and for setting up a power plant.

Videsh Sanchar Nigam Limited and GFA India have entered into a tie-up, to provide Tata Indicom Wireless Fidelity services across India .

Ranbaxy Laboratories Limited and Zenotech Laboratories Limited will inter into a strategic alliance, by which Ranbaxy will market Zenotech’s oncology cytotoxic injectible products under the Ranbaxy lable.

Raymond has planned to invest Rs 19.7 crore for capacity expansion of its factory at Vapi in Gujarat .

Tata Steel has raised $ 500 million (around Rs 2,216 crore) through an overseas syndicated term loan to fund its growth plans including acquisition.

Ashok Leyland has reported a 11 per cent rise in its total sales during February 2006 to 6,038 units. While sales in the domestic market has up by 18 per cent at 5,517 units, exports have come down by 31 per cent to 521 units over February 2005.

HOUSING

An internal committee of the RBI has recommended for the removal of priority sector status to home loans up to Rs 10 lakh. According to the technical paper on priority sector lending by the internal group, the central bank is of the view that banks are excessively exposed to home loans. This, in turn, is crowding out the much needed credit flow to other priority sector areas like small-scale industries, exports and education or others. However, the Indian Bank Association (IBA) has opposed this move. The IBA think tank feels that housing is a critical need, which requires priority sector status. Most foreign and private banks have excessively lent home loans as they do not have enough network to extend loans to other priority sector areas. It could be mentioned that fearing a home loan bubble, the RBI has tightened the risk weightage on the home loans to 125 per cent.

TELECOM

Bharat Sanchar Nigam Ltd has rolled out Worldwide Interoperability of Microwave Access (WiMAX) based internet services in 10 cities on a trial basis. The PSU is slated to extend this project to other cities after evaluating the results of this pilot project. Motorola is supplying the equipment for the trial. The ten cities are Bangalore , Chennai, Kolkata, Pune, Hyderabad , Ahmedabad, Hissar, Pinjore, Rohtam and Panipat.

Confronted with increasing congestion in the telecom networks of operators, TRAI has issued show-cause notices to six mobile service providers – Bharti, Reliance Infocomm, Reliance Telecom, BPL Mobile and Spice Communication. While clarifying that all mobile operators in the country had failed to meet the benchmarks specified by it, Trai said notices were being issued only to those in whose network congestion had increased during the period September – December 2005. The benchmark prescribed by Trai for Point of Interconnection (POI) congestion between the networks of two operators is less than 0.5 per cent. Trai said despite issuing directions to all cellular mobile services providers to comply with the quality of service parameters including the level of POI congestion, by December 31, 2005, there had been an acute worsening of the problem. In September, there were 237 POIs having congestion above 5 per cent and this increased to 249 in December 2005. It was also noticed that in some places, the level of congestion of some operators was in the range of 80 to 95 per cent. This means that out of every 100 calls, 80-90 calls fail, leading to total chaos in inter-network communications and heavy customer dissatisfaction and almost the collapse of the service. Private operators however, blamed BSNL and said the failure of the PSU to ensure timely interconnection was the primary reason for the increase in congestion.

*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

We will be grateful if you could kindly send us your feed back at epwrf@vsnl.com