Current Economic Statistics and Review For the Week 
Ended April 29, 2006 (17^th Weekly Report of 2006)

Theme of the week:

Exports: A Source of Employment Generation*

India has emerged as a leading global hub for the knowledge-based service industry particularly ITES sector, over the past decade, which has been able to provide employment opportunities to skilled workforce. However, this services revolution cannot absorb unskilled and semi-skilled workers. This poses a major challenge of providing employment for millions of unskilled and semi-skilled unemployed workers in the country and calls for the necessity of identifying areas or sectors, which would compliment the booming services sector to meet the challenges of employment generation. Export-oriented production/industries can be identified as one such area, which has a huge potential for generating jobs. With the growing globalisation of Indian economy following the reforms in 1991, exports have become a sizeable proportion of our national output. Exports are no longer primarily looked upon as a foreign exchange earner but also as contributor towards overall economic growth and well being. This sentiment has also been iterated in India ’s Annual Trade Policy (2004-09), which in its preamble has emphasised

“Trade is not an end in itself, but a means to economic growth and national development. The primary purpose is not the mere earning of foreign exchange, but the stimulation of greater economic activity. The Foreign Trade Policy is rooted in this belief and built around two major objectives. These are:

(i) To double our percentage share of global merchandise trade within the next five years; and

(ii) To act as an effective instrument of economic growth by giving a thrust to employment generation”.

However, very little information is available on the role of exports in employment generation and the policies that may help in this respect. At the same time, this information is vital for realising the twin target of earning foreign exchange reserves as well as creating job opportunities. In this context, a report prepared by Research and Information System for Developing Countries (RIS) – ‘Towards an Employment-Oriented Export Strategy’ – on behalf of the Ministry of Commerce and Industry is the first of its kind. This study makes the first exploratory attempt at assessing the role of export-oriented industry in job creation and its potential. It also outlines an employment-oriented export strategy that can help in maximising the potential of job creation by export-oriented production and in turn improve the condition of the unemployed youth. The present note seeks to present a summery of this report.

Trade and Employment

In an attempt to integrate with the rest of the world, developing countries have been liberalising their trade and investment regimes. India also opened up its economy as part of reforms undertaken during 1991. Since then the share of exports in total GDP has risen from 5.8 per cent in 1991 to 11.5 per cent in 2004-05. The ratio of incremental exports to incremental GDP has also risen in recent years, after having stagnated during the second half of 1990’s. This is indicative of the fact that contribution of exports to economic growth and activity has risen in the recent past. Thus, increasing importance of exports as a growth enhancing activity has immense implication for employment generation. At present India faces an uphill task of providing employment to around 26 million of labour force (Current Daily Status basis; 19 million in rural areas and 7 million in urban areas). This challenge is further complicated by the fact the 42 per cent of the labour force has had no education at all. This calls for an urgent need to expand unskilled/low-skilled jobs in the country which, as mentioned earlier, can be made possible by export-oriented production[1]. Countries like China , South Korea , Malasia , Taiwan and Thailand have been able to build export-oriented manufacturing industries creating job opportunities for millions. Though, the cross-country evidence on employment in export-oriented industries is constrained by lack of data in other countries, however, such information is available for export processing zones (EPZs) which have been set by a number of countries, including India, to specifically promote export-oriented manufacturing and which also account for a sizeable proportion of their total manufactured exports. Table 1 summarises some key indicators of EPZs in select Asian countries from the ILO database. it is revealed that India has not been able to take advantage of these zones when compared with other countries. In fact, many smaller countries have dome much better than India , for e.g. Bangladesh , Sri Lanka , Malaysia etc. particularly notable is China ’s performance where 15 zones generate about 30 million jobs. Thus, India has much to gain in terms of employment generation by pursuing the strategy of EPZs. In this context, Indian government’s policy on Special Economic Zones (SEZs) is a positive step. It is anticipated that establishment of many large, multi-product SEZs will trigger a large flow of foreign and domestic investment in SEZs and in infrastructure in turn, would create employment opportunities. Employment potential of over 5 lakh is expected from the new SEZs apart from indirect employment during the construction period of these SEZs. 

Estimating Employment Generation from Merchandise Export Activity

Estimation Complexities:

As mentioned above export oriented production could be an import source of creating jobs, however, reliable estimates of jobs created by export activity in India are not available (except for those available for EPZs) due to a number of methodological and data related problems. These estimates are necessary to know the current employment situation in this sector and identify its potential. The database concerning production, exports and employment are disjoined, that is to say that data is provided by different organisations (sources) and it may be difficult to fuse this data for analysis due to classification or methodological issues. For example, export figures are reported by DGCI&S using Harmonised System (HS) of trade classification. On the other hand, employment is part of production or industrial statistics contained in reports such as the Annual Survey of Industries (ASI) conducted by CSO that broadly follows ISIC classification but does not report exports by production units. Therefore one needs to combine export data from DGCI&S with output and employment data from ASI which itself involves a major exercise of finding concordance between the HS and ISIC systems of classification. This problem gets compounded further because of changing systems of classification. Furthermore exports are also undertaken by small-scale and unorganised industrial units whose employment intensities differ from that of larger enterprises (see Appendix 1) as covered by ASI. Therefore, one needs to take into account the contribution of small-scale industries to exports across different sectors and have employment indicators specific to them. There is also a problem of assessing indirect employment effect of exports including the backward linkages in input producing sectors as well as created in transport and logistics sector handling exports.

Estimates and Potential of Job Creation in Exports [2]

Conceptually total employment generated through exports could be divided broadly into direct and indirect employment. While the former refers to the employment generated by the way of producing exported goods, the latter refers to the jobs created through backward linkages of export activity. Given this, two different methods have been employed for the estimation of direct and indirect employment, which are discussed in brief in the following paragraphs.

Direct employment can be projected either using employment intensity or employment elasticity. While the latter method is preferable over the former one, the latter method calls for unit level data on output and employment, which is not available for many sectors. However, for manufacturing sector elasticity could be calculated using firm level data as the employment projection in case of primary sector is based on labour-output ratio. In case of agricultural products, the estimates have been based on cost of cultivation data, which includes cost of labour input as well. For agricultural products labour-output ratio has been used for employment projection despite preference to employment elasticity method due to absence of farm level data required to calculate elasticities for different products.

The most appropriate and commonly used method for estimating indirect employment is the use of input-output (I-O) table, which has been considered in the study to examine the distribution of employment generation in different sectors and the linkages between direct and indirect employment in each sector.

Following these methods an attempt has been made by the study to estimate jobs resulting from export activity with 2001-02 as the benchmark year. These broad estimates are summarised in Table 2. It is clear from the table that processing for merchandise exports has emerged as an increasingly important source of job creation. In 2004-05 the export sector seem to have created nearly 16 million jobs and is likely to create 136 lakh new jobs in 2009-10, thus taking the total number of jobs to nearly

30 million. However, if attempts are made to follow an employment-oriented export strategy then it would not only raise exports to $165 billion from the target of $150 billion, it could also generate 210 lakh jobs instead of 136 lakh jobs.

Towards an Employment-Oriented Export Strategy Identifying the Sectors

The employment estimates resulting from export-oriented manufacturing, as given in the previous section, suggest that it does have a potential to generate considerable number of jobs. Analytically, the growth of employment resulting from exports may lead to employment creation in a higher or lower proportion depending upon the composition of exports in terms of their labour intensity and choice of technique. In India, exports have recorded a robust growth in recent years, however, exports of labour intensive exports has slowed down[3], thus bringing their share down in total merchandise exports. Labour intensive exports such as agricultural commodities, textiles, readymade garments, and leather manufactures have witnessed near stagnation in their share in total exports. On the other hand, despite high growth, the share of gems and jewellery and emerging commodities with great export potential such as rice, horticulture and floriculture products and processed food items did not rise. In highly labour intensive industries such as toys and sports goods India ’s presence is negligible. India has not fully exploited her potential in exporting labour-intensive products as is clear from its small share of only 3 per cent in global market as against 18 per cent share of China .

Hence, a strategy focusing on industries having export potential in the international market and with relatively high labour intensity is the requirement of the day. This requires identification of industries which should form part of india ’s strategy for promoting employment and at the same time raise its exports. For this purpose, industries (3-digit ISIC) have been classified into four categories according to export and employment intensity, namely high employment and high export intensity, high employment but low export intensity, low employment but high export intensity and low export and employment intensities. The following Table lists these industries according to the mentioned classification.

The first quadrant (R1C1) of table lists industries that have relatively high employment (whether skilled or unskilled) to output ratio and which have performed well in terms of export intensities. These include industries of india ’s traditional export interest such as textiles, gems and jewellery, leather products etc. and some emerging sectors with high skill intensity. In these industries, though India has done relatively well, its potential needs to be fully exploited.

R1C2 shows industries with high employment intensity but low export intensity. Being industries with high potential for employment generation and unexploited potential for exports, these are the industries which require focus.

Industries with low employment intensity but high export intensity include the highly skill intensive industries where India has developed a comparative advantage due to the availability of highly qualified manpower (R2C1). Although employment generation per unit of exports may not be high, India is emerging as an important player in these industries; hence attention should be given on maximising employment generation. Finally industries with both low employment and export intensities are given in R2C2, and the possibility to develop their export potential should be explored.

We shall now discuss in brief the potential and challenges, in select important sectors, which should be addressed if their full potential is to be tapped.

Employment Intensive Traditional Sectors: Consolidating the Achievement and moving up in the Value Chain

Textile and Garments

This is among the most important sectors from the point of view of employment. Although the textiles and clothing industry accounts for a substantial proportion of India's exports (average of around 21 per cent in last 5 years) and has a nearly 4 per cent share of the world market, there are reasons to believe that the sector has the potential for a major boom in the next five years. These factors include the phase out of MFA quotas, impending restraints on current dominant player in the market, viz. China . However, this industry is faced with challenges of

·        Consolidation and modernisation of its fragmented production structure.

·        Infrastructure bottlenecks.

·        Trade barriers, both tariff and non-tariff, in the major markets of US and EU.

·        Emphasising on value-added exports like garments rather than fabrics and high-fashion garments.

·       Focusing on highly traded value added segments within garments, such as suits and jerseys where India ’s presence is lower.

Leather Goods

Leather is another important area from the point of employment generation with 60-70 per cent of exports carried out by small-scale industries. It has been a traditional sector although its importance in India 's total exports has declined over time from 8 per cent in 1980s to around 3 per cent in the recent years. This sector has seen a transformation from being exporter of mainly raw materials to value added goods such as leather garments, gloves, etc. India 's overall share in leather goods is about 3 per cent but the country commands a sizeable share in certain value-added items such as leather garments. Like textiles they also face major policy challenges including

·         Consolidation and modernisation of production structure.

• Dealing with trade barriers in developed countries in particular the environmental standards.
• Moving up the value chain in high fashion garments and shoes; setting up design centers around the clusters of leather industry.
• Developing a quality culture and promoting brands.

Gems and Jewellery

The gems and jewellery sector has emerged as one of India 's most important contributors to export earnings and also employment. In 2004 -05, India exported gems and jewellery worth US$ 14 billion, accounting for nearly 17 per cent of India 's total exports. In the segment of cut and polished diamonds, India commands a dominant position in the world with a 80-85 per cent market share although this share is lower at 55-60 per cent in terms of value, suggesting that Indian exports are concentrated in relatively lower value segments. Also, its share in the world jewellery segment is low at around 4 per cent. This industry requires relatively lower infrastructure facilities compared to other industries. Major policy challenges for the industry are

• Moving up the value chain in the cut and polished diamonds segment and improving our share in high value segment. There is a strong need to build a strong "Made in India " brand, which is acceptable worldwide.

• India needs to leverage its dominance in the gems industry to strengthen its position in the jewellery segment. While retaining the traditional strengths in custom made jewellery, capabilities in machine made jewellery should be expanded.

·        Need for strengthening the design capability where India lags behind Italy , Hong Kong and Germany .

Agricultural Commodities and Processed Foods: Large Export and Employment Potential

Most of the exports under agricultural exports are of conventional farm products like rice, wheat, tea coffee, marine products, etc. however, most of these products face constraints in the form of very strong domestic demand and inadequate infrastructure facilities which inhibit exports. Hence, major improvement in productivity and removal of infrastructure bottlenecks is essential to realise higher exports from this sector.

Despite significant growth in exports since 1991-92, India 's share in the international food trade is quite negligible at around 1.5 per cent. India 's share of world exports is also insignificant in most broad segments. India must develop proper post harvest management practices and building processing facilities in order to increase its global market share. Various areas with large employment and export potential where India must focus are given below in brief.

Horticulture Exports

India has a wide variety of climate and soils on which a diverse and large number of horticultural crops could be grown. These include fruits, vegetables, potato, tropical tuber crops, mushrooms, ornamental, medicinal and herbal plants, plantation crops, spices, cashew, cocoa, etc. It is becoming increasingly apparent that horticulture crops are ideal for achieving sustainability for small and marginal holdings as well as creating productive employment for the vast agricultural labour pool. However, it is only recently that the government and the policymakers have started taking note of the enormous potential of this sector. By improving the prospects for this sector, not just agriculture will become more profitable but this will also help in efficient land utilisation, creating semi-skilled and gainful employment for the rural folks, and optimise the utilisation of natural resources (soil, water, and environment). India has emerged as the largest producer of coconuts, arecanut, cashew, tea, mango, and banana, among others. India is the second largest producer of fruits and vegetables in the world and therefore has a huge potential in the export of these farm products. But only 2-3 per cent of them are processed and as much as 25-30 per cent go waste. Hence, a planned approach towards this sector is required, which will not only raise its foreign exchange earnings but also provide gainful employment.

Dairy Products

India has emerged as the biggest producer of dairy products in the world. But her share in the world trade is very small at 1-2 per cent of world trade of around 40 million tonnes. Part of the reason for this is the fact that more than 60 per cent of India 's milk production is non-cow milk based. The international trade is largely in the dairy products based on cow's milk putting India in a disadvantageous position. India also faces high peak tariffs as indicated in Table 4.2 and many non-tariff barriers in this sector, which has restricted India 's share in world trade of dairy products. Nonetheless, there is huge potential in this sector from export as well as employment point of view as has been amply shown by the cooperative dairy movement in western part of the country. How the country negotiates in the multilateral agreements will also determine India 's exports of dairy products.

Processed Foods

Food processing is an emerging industry in the Indian economy employing a large labour force. There has been a marked acceleration since the late 1990s and the sector has been growing at about 9 per cent annually. The food-processing sector includes many different segments ranging from sugar and related items to edible oils to bakery products, etc. Of these, primary food processing is a major segment with large number of rice-mills/hullers, flourmills, pulse mills and oilseed mills, bakeries, traditional food units and fruit/vegetable/spice processing units in the unorganized sector. With an abundant availability of raw materials, this sector has a potential for sustained high growth in exports as well as domestic consumption.

Employment Intensive Industries with Unexploited Export Potential  

Toys and Sports Goods

The toy industry represents a classic case of a highly employment intensive industry with a sizeable international market, where India has failed to make a mark. The international market of toys is dominated by China , which has a 75 per cent market share whereas India 's share is an appalling 0.4 per cent. This is an industry where India needs to make a determined effort to enter in the world market. It will not be easy given the Chinese dominant presence, which has the advantage of large scales of production, cheap costs, and access to major design centers in Hong Kong . The major policy challenges are as follows:

• Attracting major MNEs in the industry to set up export bases in India . This may also have major favourable spillovers for the domestic toys industry in terms of technological and market information.

• Strengthening the domestic infrastructure for toys testing and designing; smaller firms should be provided these facilities on nominal charge basis.

• The toy safety standards recently established by Bureau of Industry Standards (BIS) in tune with EU EN71 should be made mandatory. This will make domestic industry compliant with the standards prevalent in Western countries and will ease the entry in the international markets.

•  

Modern Skill Intensive Industry with Unexploited Potential

Consumer Electronics and Electronic Hardware

Although India has emerged as a leading player in the IT software industry in the world, it has failed to make a mark in IT hardware and other electronics equipment and components. Except in select segments such as recording media and (colour picture tubes) CPTs, Indian presence in the electronics industry abroad is negligible. Considering the fact that the electronics industry can be highly employment intensive and can generate thousands of jobs in assembling, it’s potential should be developed.

Elements of an Employment-Oriented Export Strategy

It is clear that there are a number of unexploited opportunities for expanding exports as well as employment, and if we can take advantage of these opportunities, it will be possible to surpass the US$ 150 billion target for exports set by the Government of India for 2009-10 and generate more jobs for India 's youth. In this section we summarise the key policy challenges required to attain the twin objectives of rise in exports along with a rise in employment.

Policy for Small Scale Industries (SSIs)

Given the fact that Indian manufacturing firms are predominantly small in size, policies that support these firms are desirable. These policies should aim at designing and implementing programs to ensure SSIs access to required information on export opportunities, providing technological supports, and greater access to credit markets and export distribution channels, which in turn would help in enhancing the export potential of the sector. The policy of small-scale sector reservation, which enables any foreign large scale enterprise to compete with Indian small scale units through exports but prevents domestic large scale enterprises to compete with them, needs a relook. The principle of providing protection to small enterprises may have merit for development of entrepreneurship and generation of jobs. However, with the trade liberalization and hence entry of foreign exporters, the policy needs to be fine-tuned to the new realities. Rather than entry protection, small enterprises may be assisted in a number of ways some of which are mentioned above.

Furthermore, SMEs are often unable to capture market opportunities, which require large production quantities, homogenous standards, and regular supply. They also experience difficulties in achieving economies of scale in the purchase of inputs such as equipment, raw materials, finance, consulting services, etc. The scale of their operations prevent them from achieving specialised and effective internal division of labour that fosters cumulative improvements in productive capabilities and innovation. Experience of other countries has shown that strategy of developing industrial clusters enable the small firms to overcome these constrains that impact their export competitiveness. Hence, many of the issues confronted by the small and the medium enterprises could be addressed by promoting industrial clusters.

Linking Export Incentives to Incremental Exports rather than Total Exports

There is a need for prompting more firms into exporting activity and to encourage exporting firms to export a greater proportion of their sales. For this the tax incentives given by the government on export profits could be linked to incremental exports rather than total exports. This would push larger companies to increase their export intensity while inducing small-scale industries.

Attracting Export-Oriented Foreign Direct Investments

India has not been able to exploit the potential of export-oriented FDI that accounts for 55 per cent of China 's exports and a very substantial proportion of exports in other Southeast Asian countries, although of late MNEs such as Hundai, Ford etc have started using India as a platform for export oriented production. Export-oriented FDI in knowledge-based industries have other favourable externalities as well; they not only result in transfer of technology but also crowd-in domestic investment by creating demand for intermediate goods. Hence, India's ability to offer to MNCs access to a large and expanding domestic market besides other resources such as low cost but high quality human resources, needs to be leveraged effectively for getting them to consider India as a base for export-oriented production.

Fixing Infrastructural Constraints

In a number of industries, infrastructure such as availability of power, congestion of ports among other facilities is becoming a bottleneck. Without addressing these constraints, ambitious plans for export-oriented industrialisation will not materialize. Therefore, these constraints need to be dealt with in an urgent manner.

Strengthening the Enterprise-level Innovative Activity

A firm's in-house technological effort is one of the most important factors in shaping the patterns of competitiveness of enterprises, especially in knowledge-intensive industries. Developed countries spend billions of dollars in Research and Development (R&D) activity in the form of subsidies, which is given to national enterprises to encourage innovations so as to enhance their competitiveness (such subsidies upto 50 per cent of project costs have been made non-actionable under WTO rules). In recent times, the Indian government has set up funds for specific industries such as pharmaceuticals to assist the R&D activity, but these funds have remained underutilised due to arduous conditions attached. There is obviously need for a generous programme to push R&D activity of enterprises by subsidies for viable R&D proposals of industry to strengthen India 's competitive edge.

Social Safety Nets and Labour Reforms

While competing in the fast changing international markets, industry may need certain flexibility in labour laws. However, labour reforms that industry has been seeking need to be implemented in conjunction with strong social safety nets and social security policies to make sure that the restructuring does not adversely affect workers.

Restricting Raw Material Exports

The employment-oriented export policy, in principle, should encourage export of value added items and thus restrict export of raw material and minerals such as iron ore, bauxite among others. These restrictions will attract investments in the country in processing of these raw materials into higher value items.

Moving up the Value Chain

In a number of industries of India's traditional forte such as textiles, garments, leather goods, gems and jewellery, agricultural products, India needs to consolidate her position in the world market and move up the value chain by taking stake in international marketing networks. For example, Tata Tea's acquisition of Tetley Group is an example of taking control of the full value chain in the tea industry. For this, Indian enterprises should be encouraged to build brands, undertake outward investments or acquisitions to establish their presence in major markets and move up the value chain.

Conforming to International Standards

In all the high technology areas the first step towards entering the world market is to ensure that the products are in conformity with the standards prescribed by the importing countries. More often than not standards vary from country to country and that in turn calls for investment in testing facilities which is beyond the reach of many of the producers. In this context, a two-pronged action could be undertaken:

• First, common testing facilities may be set up which may be made use by the prospective exporters.

• Secondly, there is the need for assessing the present situation with respect to the compatibility of our standards with that of prospective importers and enter into mutual recognition with regard to standards and conformity assessment procedures.

Conclusion

This Report has made an exploratory attempt at estimating employment resulting from export activity. The analysis suggest that export activity has the potential to create significant number of new jobs if steps are taken to exploit emerging opportunities in some sectors and tapping the full potential of the existing sectors which have already made a mark in the international markets. The study also identifies the sectors which are not only capable of earning good foreign exchange but also can create employment by using labour intensive techniques.

References:

Ministry of Commerce and Industry (2004), “Foreign Trade Policy 2004-09”, Government of India .

RIS (2006), ‘Towards an Employment-Oriented Export Strategy: Some Explorations”

(* This note is prepared by Abhilasha Maheshwari)

Appendix A

In the study, the relationship between firm size, exports and employment intensity has been analysed with the help of firm level panel data set covering 1174 observations for Indian manufacturing companies for three years – 242 firms in 2002, 418 in 2003 and 514 in 2004. Analysis from this data gives an impression that while export intensity is independent of firm size, employment intensity is not. Table A.1 illustrates that export intensity does not vary significantly across different size class of firms, however, employment intensity (defined as employment generated per Rs 1 crore of output) is found to decline steadily with increase in farm-size: small firms (less than 10 crore output) tend to have larger employment intensity than larger firms. This could be because of difference in techniques in terms of factor proportions. The study also points out that though small-size firms are found to be having high employment intensity as well as export intensity, a large proportion of smaller firms do not export at all, but when they do, the export intensity is not much different from larger firms. However, we can infer based on above observations that any policy initiatives that promote the export intensity of small sized firms are more likely to generate additional employment as compared to larger firms, even though only some smaller firms export. Hence, the Report suggests that it is important to encourage smaller firms to get into export market by providing them various incentives and assistance.

Highlights of  Current Economic Scene

AGRICULTURE

The first consignment of wheat imported from Australia is expected to arrive at Chennai port in the country on April 24, 2006. However, this consignment has been scheduled to arrive in the country by the end of March 2006. The central government had decided to import 5 lakh tonnes of wheat to replenish the declining wheat stock in the central pool. In addition to this, it has decided to import another thirty lakh tonnes of wheat owing to relatively lower wheat procurement during the ongoing rabi marketing season 2006-07 and imports (Rs 9,978 per quintal) being cheaper than domestic procurement (Rs 10,308 per quintal). Wheat imports would be carried out by official agencies like the State Trading Corporation (STC) at zero duty.

The central government has also decided to pay a bonus of Rs 50 a quintal on top of the minimum support price of Rs 650 a quintal to wheat growers who sold their produce to the Food Corporation of India (FCI) or state grain procurement agencies. This bonus would be applicable with retrospective effect from March 20 when the wheat procurement operations commenced. This will cost the exchequer Rs 731 crore.

The government of Maharashtra has approved the contract farming bill. The Contract Farming Act is designed to encourage the investment in the food processing industry of Maharashtra and export of farm produce, which would ensure farmers get the best prices for their produce. As the new law allows buyers of farm produce to enter into direct agreement with the farmers, the farmers would be also saved from paying commission and other charges to agriculture market produce committees. So far Cargill Foods, Metro Cash and Carry, ITC, Hypercity and Shoprite are some of the companies have shown the interest in the contract farming sector in the state.

As per the forecast of the Rubber Board, the production of natural rubber would stand at around 8.31 lakh tonnes in 2006-07, reporting a rise of 3.5 per cent over the 8.03 lakh tonnes produced in 2005-06. The consumption is expected to grow by 5 per cent to 8.41 lakh tonnes over the previous year. While the closing stocks are expected to be around 0.78 lakh tonnes, the export has been projected at 0.5 lakh tonnes and imports at 0.45 lakh tonnes during 2006-07.

The central government has agreed to release 5.3 lakh tonnes of maize and broken rice to poultry farmers following a meeting of the National Egg coordination committee (NECC). The provision of food grains for the poultry feed would help the poultry industry to revive and bring back the production to normal levels. The ministry of agriculture has planned a promotional campaign through the print and electronic media to boost the consumer confidence. The ministry has also recommended the implementation of the zoning programme (differentiating between the bird flu affected and unaffected poultry zones) to facilitate movement of poultry products nationally and internationally specially from export-targeted areas.

The World Bank has approved a credit of $200 million for India ’s National Agricultural Innovation Project. The project will support the development and implementation of agricultural innovations through collaborations among farmers, civil society, public sector and private sector organisations. The project responds to the goals addressed in the National Policy on Agriculture (NPA) and the 10th Five-Year Plan, which gives high priority to agricultural productivity as a means to reduce rural poverty.

According to Cashew Export Promotion Council of India (CEPCI), cashew exports from the country have registered a decline in terms of quantity as well as value during 2005-06 as compared to previous year due to 15 per cent fall in price of cashew during the January-March 2006 and consequent request from the overseas buyers to postpone part of shipments scheduled for March 2006 to April-June 2006. The exports have stood at 1,14,143 tonnes, a fall of 9.8 per cent over the previous year and have been valued at Rs 2515, down by 7.2 per cent against that of the previous year.

INFLATION

The annual point-to-point inflation rate based on wholesale price index (WPI) has gone down to 3.24 per cent for the week ended April 8, 2006 from 3.51 per cent during the previous week. The inflation rate was at 5.86 per cent in the corresponding week last year.

The WPI in the week under review has declined by 0.1 per cent to 197.6 from 197.7 in the previous week (Base: 1993-94=100). The index of primary articles’ group (weight 22.02 per cent) has declined by 0.3 per cent to 195.1 from the previous week’s level of 195.7, mainly due to a considerable decline by 0.6 per cent in the price index of food articles.  The index of ‘food articles’ has gone down to 197.9 from 199 in the previous week, mainly due to a fall in the prices of eggs, wheat, fruits and vegetables, pork, bajra and fish-inland. The index of ‘fuel, power, light and lubricants’ group (weight 14.23 per cent) has remained unchanged at the previous weeks’ level of 316.7. The index of ‘manufactured products’ group constituting the maximum of 63.7 per cent of total weight, has gone up a tad by 0.1 per cent to 171.9 from the previous week’s level of 171.8. The major groups, which contributed to this increase, were the food products, textiles, ‘chemical and chemical products’, ‘non-metallic mineral products’ and base metals.

The latest final index of WPI for the week ended February 11, 2006 has been revised downwards; as a result both, the absolute index and the implied inflation rate stood at 196.2 and 3.81 per cent as against their provisional levels of 196.6 and 4.02 per cent, respectively.

BANKING

Commercial banks’ exposure to the real estate sector has almost doubled in the first 10 months of 2005-06 over the March 31, 2005. The total outstanding loans to real estate rose by 84.4 per cent to Rs 24,527 crore as on January 20, 2006 from Rs 13,302 crore as on March 31, 2005 according to RBI’s report on macroeconomic and monetary developments in 2005-06. The sharp rise in loans to real estate made RBI to announce guidelines on exposure to real estate last month. The guidelines practically ban banks from lending to real estate developers for purchase of land. Banks are allowed to lend only after developers obtain all necessary approvals from the state and local authorities, which can happen only after the land is acquired. Credit to real estate increased sharply, although it still constitutes only a small part – less than 2 per cent of outstanding non-food credit and around 4 per cent of incremental non-food credit. The incremental growth in personal loans was 27.0 per cent, largely a contribution of housing loans, credit card loans and educational loans. Housing loan outstanding as on January 20, 2006 increased by 29.1 per cent (Rs 37,431 crore) to Rs 1,66,159 crore from Rs 1,28,728 crore as on March 31, 2005. Loans outstanding on credit cards were up by Rs 53.3 per cent or Rs 3,072 crore to Rs 8,832 crore during the period. Similarly, education loans outstanding rose by Rs 3,884 crore to Rs 9,003 crore. The incremental growth in non-food gross bank credit up to January 20, 2006 was 25.7 per cent. The outstanding non-food credit increased by Rs 2,56,580 crore to Rs 12,56,368 crore. Industrial sector availed Rs 66,480 crore of loans from the banking system in the first 10 months of 2005-06 against Rs 35,485 crore a year earlier. The increase in industrial credit in consonance with sustained growth in domestic industrial production was mainly on account of infrastructure, textiles, iron and steel, chemicals, vehicles, gems and jewellery, food processing and construction. The infrastructure sector alone accounted for more than a third of incremental credit to the industry, while textiles and iron and steel industries absorbed another one-fourth.

PUBLIC FINANCE

The Finance Act, 2006 (No.21 of 2006) has received the assent of the President on the April 18, 2006.  Service tax leviable on taxable services under section 66 of the Finance Act, 1994 has been increased from 10 per cent  to 12 per cent  with effect from the date of the assent of the President.  In addition to 12 per cent , education cess at the rate of 2 per cent of 12 per cent  i.e. 0.24 per cent is also leviable.  The total tax leviable on taxable services thus works out to 12.24 per cent of the value of taxable services.

As per the department of revenue, a service tax has been imposed on the on-board catering services of Indian railways.

The Ministry of non-conventional energy sources, informed that Rs.2000 crore would be spent to provide electricity to around 10,000 remote villages apart from remote hamlets through renewable energy under the Rajiv Gandhi Grameen Vidyuti Karan Yojana for providing electricity to rural households. The electrification of these villages would be carried out during the next three years.

 
The government has sanctioned the payment of normal rebate as well as special rebate on Khadi and Khadi related items for the year 2006-07. The trading institutions which are engaged only in marketing of khadi, would be given the rebate only after they have been subjected to an audit.

FINANCIAL  MARKET

Capital Markets

Primary Market

D.S.Kulkarni Developers Limited will be tapping the market, on April 25, with their public offer of around 55 lakh equity shares with a price band of Rs—and Rs ---. The issue closes on May 3, 2006.

The 100 per cent book built IPO of Reliance Petroleum ltd has been oversubscribed by a record 50 times, receiving bids for a total 2226 shares, as against 45 crore shares on offer in the price band of Rs 57 to Rs 62. Among the various categories, the qualified institutional buyers segment has been oversubscribed by nearly 67 times, while the non-institutional investors category has been oversubscribed by nearly 22 times and the retail portion has been oversubscribed by over 11 times.

Secondary Market

The announcements of good corporate results coupled with the global rating agency Standard and Poor’s decision to revise its outlook on India’s sovereign credit rating and also the agency’s confirmation of it BB+/B ratings on sovereign and hinting of a further scope of upgradation to investment grade if the country’s public finances are improved, buoyed the market sentiments. Moreover, the RBI decision to keep the reverse repo rate, repo rate unchanged in its annual credit policy has also fuelled the market rally. All these underlying bullish sentiments have resulted into the bourses resuming their northward movement after witnessing a correction in the previous week. The sensex has crossed yet another milestone of 12,000 points as it closed at 12030.30 points on April 21 registering a massive week-on-week gains of 7.06 per cent.  Likewise, the nifty has also gained 6.820 per cent to close at 3573.05.

Among the sectoral indices, BSE OIL and Gas has registered the highest weekly gain of 10.15 per cent (5544.08 points), followed by BSE Metal at 9.96 per cent (10343.86 points). Meanwhile, the BSE Mid-Cap and BSE Small-Cap have registered gains of 4.78 per cent and 3.86 per cent, respectively.

The FIIs have remained net sellers in the equity market to the extent of Rs 957.7 crore with purchases worth Rs 11332 crore and sales of Rs 12290 crore. Meanwhile, the mutual funds have continued to remain net buyers to the tune of Rs 569.71 crore with purchases worth Rs 3365 crore and sales of Rs 2795 crore.

Derivatives

The prevalent bullishness in the cash market has resulted into high volatility in the market and although the bullishness and trading was concentrated in a few F & O counters, the NSE’s derivative segment has registered an increase in its weekly turnover to Rs 201,273 crore from Rs 128,245 crore in the previous week. As usual the stock futures have contributed to the bulk of trading with a weekly turnover of Rs 124984 crore and the index futures turnover stood at Rs 53140 crore.

Government Securities Market

Primary Market

During the week, the RBI has mopped up Rs 760 crore and Rs 500 crore through 91-day treasury bill and 182-day treasury bill. The cut-off yields for 91-day and 182-day treasury bills were 5.4065 per cent and 5.6075 per cent, respectively.

Meanwhile, the RBI has also announced the re-issue of 7.40 percent 2012 and 7.95 per cent 2032 for a notified amount of Rs 6,000 crore and Rs 4,000 crore, respectively, on April 25.

Secondary Market

Following the annual credit policy, wherein the RBI has left the reverse repo rate, repo rate unchanged, in an attempt to ensure appropriate liquidity consistent with price and financial stability, the market has turned buoyant. Further, the rating agency Standards and Poor’s decision to upgrade the outlook on Indian sovereign rating to positive from stable also boosted the market sentiments. Also, the RBI intervention in the forex market resulted into robust money market liquidity. However, a rise in the US treasury yields following a stronger than expected consumer price data capped the market sentiments. The call rate moved around the reverse repo rate for most part of the week to end at 5.50-5.60 per cent. The average daily subscriptions at the reverse repo auction have risen to Rs 54329 crore from Rs 52300 crore in the previous week. Meanwhile, the weighted average yield of 8.07 per cent 2017 paper eased to 7.4268 per cent as compared to 7.5609 per cent on April 13, while the spread between 1-11 year paper has increased by 34 basis points to 170 basis points.

Bond Market

During the week, the corporate bonds yields have eased sharply as the LAF rates were kept unchanged in the annual credit policy. The triple-A 5-year benchmark yield has eased to 8.10 per cent from 8.20 per cent.

Foreign Exchange Market

In the forex market, rally in the domestic stock market coupled with the Standard and Poor’s decision to upgrade the outlook on the Indian sovereign rating resulted in the rupee appreciating to Rs 45.07 per dollar from Rs 45.17 per dollar intra-week, before closing the week at 45.14 as compared to Rs 45.19 in the previous week. The rising international crude oil prices and the RBI intervention in the market through state run bank capped the rupee movement against the dollar. In the forward premia market, the six-month annualised premia eased to 0.99 per cent on April 21, as compared to 1.28 per cent on April 13.

Commodities Futures Derivatives

In the commodity futures trading, the continuing arrivals of desi urad in Andhra Pradesh and Madhya Pradesh as well as the heavy margins imposed by the exchanges on long positions have resulted into a fluctuating trend in the pulses trading. Meanwhile, the bearish sentiments in the global pepper market on account of aggressive selling by Vietnam has resulted into a decline in the prices of pepper by around $50 per tonne, which in turn has also affected the domestic pepper trading, given that India imports pepper from Vietnam. On the other hand, supported by fundamentals the rubber prices have continued to rise, irrespective of the fact that harvests were at an all time high.

CREDITRATING

Care has assigned ‘AAA’ rating to the proposed Rs 250 crore Tier-II subordinated bond issue of Vijaya Bank. The assigned rating factors in the full ownership of the bank by government of India , long standing track record, comfortable capital adequacy, superior asset quality and strong solvency position of the bank.

Care has retained the ‘PR1+’ rating assigned to commercial paper programme aggregating to Rs 14.45 crore of Zandu Pharmaceuticals Work Limited. The rating draws support from the company’s significant position in the domestic classical ayurvedic medicines market.

Care has assigned ‘PR1’ rating to commercial paper programme aggregating to Rs 50 crore (enhanced from Rs 20 crore ) of Elder Pharmaceuticals (EPL). The rating factors in EPL’s established track record, dominant position of some of its brands in their respective therapeutic segments and its marketing alliance with established pharmaceuticals companies having global presence.

CORPORATE SECTOR

Reliance Energy Limited (REL) has singed a Memorandum of Understanding with the Maharashtra Industrial Development Corporation to set up two group captive power plants at Butibori in Nagpur and thane-Belapur belt near Mumbai. The total investment on both plants would be around Rs 500 crore. The 165-mega watt (mw) plant at Thane-Belapur industrial estate will be gas based, while the 130-mw plant at Butibori will be coal based plant. Both the plants are expected to be operational within three years.

Pantaloon Retail has entered into a deal with CapitaLand, a Singapore-based property, hospitality and real estate financial services company, to form two joint venture firms. The foreign company will also invest in a real estate fund, being managed by Pantaloon.

US based private equity fund Kohlberg Kravis Roberts and Company (KKR) has bought 85 per cent in Flextornics Software System, the Indian subsidiary of Singapore based Flextronices, for nearly $ 900 million.

Thermax, solution provider in energy and environment engineering, has secured an order worth Rs 360 crore from a leading business house for their refinery project. The company’s boiler and heater group has received the order, which entails designing, manufacturing, supplying, construction and commissioning of auxiliary boilers and heat recovery steam generator.

TCS has received Rs 2,200 crore outsourcing deal from global financial services giant Citi group Inc. it is an application, maintenance and development contract based on a take-or-pay-order system.

National Rayon Corporation (NRC), manufacturer of rayon, tyre cord and caustic soda, has entered into a memorandum of understanding for sale of part of its land at Kalyan for Rs 167 crore.

Oil and Natural Gas Corporation (ONGC) has posted a 9 per cent rise in net profit to Rs 14,175 crore during 2005-06. ONGC has produced 24.4 million tonnes of crude oil during 2005-06. High international crude oil prices, exemption from paying subsidy to GAIL and selling joint venture gas at market prices have been some of the factors that led to the increase in profits.

Mangalore Refineries and Petrochemicals Corporation (MRPL), a subsidiary of ONGC, has witnessed a 57 per cent decline in net profit in 2005-06 to Rs 380 crore. The move of public sector oil marketing companies like Indian Oil, Hindustan Petroleum and Bharat Petroleum to freeze prices of petroleum products has resulted in low realisation in the domestic markets, affected profit of MRPL.

Hexaware Technologies has posted 103.20 per cent rise in net profit to Rs 20.91 crore in the first quarter ended March 2006. On a consolidated basis, the group has posted net profit of Rs 26.02 crore during the quarter under review, up 12 per cent.

Rallis India has registered 27 per cent rise in net profit of Rs 42.53 crore in the financial year ended March 2006.

On the back of strong demand for cement from construction industry, Gujarat Ambuja Cements, India ’s third largest cement maker, has reported a whooping 108 per cent increase in net profit to Rs 298.6 crore for the third quarter ended March 2006. The company has sold 3.65 million tonne of cement compared with 3.19 million tonne in the corresponding quarter of the previous year.

Indo Rama Textiles has reported 70 per cent jump in net profit for the year ended March 2006 to Rs 20.90 crore. Reduction in the duty on raw material for the spinning industry has helped the company to post good performance. 

Pharmaceutical major Ranbaxy Laboratories has posted 0.8 per cent increase in profit after tax to Rs 71.4 crore for the quarter ended March 2006. The company’s global consolidated sales have gone up 12.03 per cent quarter-on-quarter to Rs 1,275.3 crore.

JSW Steel has reported 1.48 per cent increase in net profit at Rs 410.68 crore for the quarter ended March 2006. For the financial year ended March 2006, the company has reported drop of 1.6 per cent in its net profit at Rs 856.53 crore. The company expects to increase its crude steel capacity from 2.5 million tonne per annum to 3.8 million tonne per annum by the second quarter of the current financial year. The capacity in pellet plant will be expanded by 0.8 million tonne per annum and will be completed by end June 2006. Among its new projects, the one million tonne cold rolling complex is expected to be operational in the first half of FY08.

National Thermal Power Corporation’s net sales during 2005-06 have stood at Rs 25,992.8 crore, higher by 15.36 per cent over 2004-05. However, the company has reported 1.73 per cent fall in net profit for 2005-06 to Rs 5,706.1 crore.

Sugar major Bajaj Hindusthan Limited (BHL) has reported 210 per cent jump in net profit in the second quarter ended March 2006 at Rs 64.51 crore. The company’s total revenue increased by 288 per cent at Rs 421.73 crore over the same period previous year. The company is the largest producer of industrial alcohol and ethanol in the country and is also setting up additional co-generation plants to meet its captive power requirements. The ongoing expansion of BHL’s distilleries will increase its production of industrial alcohol from 320 kilo litres per day to 800 kilo litres per day.

Marico Limited has reported 17.67 per cent rise in net sales at Rs 268.87 crore over the same period previous year and net profit has increased by 14.51 per cent to Rs 27.06 crore.

LABOUR

Many states have asked the centre to estimate the cost of higher wages and salaries of the state government employees before the formation of the Sixth Pay Commission. This unusual demand is the result of the worst financial impact of the introduction of the Fifth Pay Commission, 1997 in the states. The past experience of the Fifth Pay Commission show that states have suffered badly on account of increased salary and pension bills. Before the recommendation of the Fifth Pay Commission, the wage bill (including pension dues of Rs 5094 crore) of the centre  stood at Rs 21,885 crore in 1996-97. This went by 99 per cent to Rs 43,568 crore in 1999-00. For states, the wage bill went up by 74 per cent to Rs 89,813 crore from Rs 51,548 crore during the same period. Therefore, the central government has begun informal consultations with other stakeholders to set up the Sixth Pay Commission. It is expected that the centre will attempt to implement the award of the Sixth Pay Commission by 2008-09, before the next general elections.

INFORMATION TECHNOLOGY

Tata Consultancy Services (TCS) has posted 76.38 per cent growth in net profit at Rs 832.12 crore for the quarter ended March 31, 2006, against the corresponding previous quarter’s Rs 471.77 crore. Total income during the period went up by 43.85 per cent to Rs 3709.21 crore from Rs 2578.52 crore in the same period last year. TCS has announced its maiden 1:1 bonus ratio, which means shareholders will get one bonus share for every equity share they hold. The company has also announced final dividend of Rs 4.50 per share, taking the total dividend of Rs 13.50 for 2005-06. The face value of TCS stock is Re 1. Earning per share (EPS) for 2005-06 increased to Rs 60.63 from Rs 42.02 in 2004-05.

TCS has bagged $500 million (Rs 2,200 crore) outsourcing deal from global financial services giant Citigroup Inc. It is an application, maintenance and development contract, based on a ‘take-or-pay-order’ system. TCS will execute the deal from its global delivery centres across the world, including from the one set up recently in London . Under this system, TCS will be paid a fixed sum of money for completing the work within a stipulated time. In the first year, TCS would employ 2,200 people for the assignment and would ramp up it in the successive years, depending on the contract.

Wipro has posted a 43 per cent increase in net profit for the quarter ended March 31, 2006 at Rs 617.9 crore, against a net of Rs 433 crore posted in 2004-05.

Infosys Technologies will pay Citigroup $115.13 million (Rs 518 crore) in cash to buy out its 23 per cent stake in Progeon, the BPO subsidiary of Infosys. The deal will be completed by July 2006.

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

LIST OF WEEKLY THEMES

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