Revision of National Accounts Statistics

Part II *

Saving and Capital Formation Estimates

VI
Significant Coverage and Procedural Changes in Saving and
Capital Formation Estimates

More than the coverage of production and consumption data, it is the procedural changes and changes in coverage in estimating saving and capital formation which have produced far-reaching alterations in results on account of the latest revision in NAS. The estimates have catapulted the Indian economy from the image of a low saving and low investment economy to that of a high saving and high investment economy, that is, from a saving-investment level of 23-24 per cent of GDP to that of 29-30 per cent of GDP. This sudden upgradation of the saving-investment scenario has been achieved in the new series of NAS through a number of estimational devices which require closer scrutiny. Before doing so, let us look at the artefacts of changes in saving and investment rates.

First, upward revisions had been introduced of late in domestic saving rates in the old series themselves which were closely examined in literature (Shetty 2005 and Chaudhuri 2005). Now, the domestic saving rates have been further revised upwards in the new series. As shown in Table 7, gross domestic saving as percentage of GDP at current market prices stands pulled up by about one percentage point from a range of 24 to 28 per cent in the old series to 25 to 29 per cent in the revised series in each of the years 1999-2000 to 2003-04. Also, within the revised series, gross saving rate has risen somewhat faster from 24.9 per cent to 28.9 per cent during the above five-year period and it has further risen to 29.1 per cent in 2004-05.

Table 7: Estimations of Gross Domestic Saving and Capital Formation at Current Prices
A. Gross Domestic Saving
(Rupees, crore)
Year	New 1999-00 Series	Old 1993-04 Series	As Percentage of Respective GDP
			New Series	Old Series
1999-00	487,301	468,681	24.9	24.2
2000-01	496,272	490,049	23.5	23.5
2001-02	537,966	532,274	23.6	23.4
2002-03	648,994	642,298	26.5	26.1
2003-04	797,512	776,420	28.9	28.1
2004-05	907,416	-	29.1	-
B. Gross Domestic Capital Formation (including valuables in new series and also adjusted for errors and omissions)
1999-00	509,289	490,669	26.0		25.3
2000-01	509,026	498,179	24.2		23.8
2001-02	523,737	513,543	23.0		22.6
2002-03	620,508	610,288	25.3		24.8
2003-04	752,132	726,868	27.2		26.3
2004-05	939,555	-	30.1		-
(Old series are not available beyond 2003-04) Source: Same as in Table 1

Second, as shown in Table 8, upward revision in total saving numbers for all the five years from 1999-2000 to 2003-04 are due to sizeable increases in the saving estimates of the public sector, which, as explained below, have been brought about by the newer economic and purpose-wise classification of government expenditure. Office expenses have been classified for the first time as between current and capital expenditures and losses of departmental enterprises have been treated as subsidies. Besides, undistributed profits accrued to the unit holders have been excluded from the saving of UTI and included under household saving. But, apart from these estimational changes, the improvement in pubic saving, particularly in years 2003-04 and thereafter, has been buttressed by a steady decline in revenue deficits of the central and state governments. There has been some upward revision in the savings of the private corporate sector too, but both the financial and physical components of household sector savings have faced downward revisions, with the physical assets components experiencing generally steeper revisions.

Table 8: Estimates of GDS by Institutional Sectors, 1999-2000 to 2004-05:
A. Comparison of Old and Revised Estimates
(Rupees, Crore)
Sector	2004-05	2003-04	2002-03	2001-02	2000-01	1999-00
1. Public Sector
Old (1993-94) Series		-9,429	-26,652	-61,912	-48,361	-20,049
New Series	69,390	28,026	-16,181	-46,377	-37,062	-16,659
Difference (New-Old)		37,455	10,471	15,535	11,299	3,390
2. Private Corporate Sector
Old (1993-94) Series		114,157	94,269	81,076	86,142	84,329
New Series	150,947	120,852	99,767	81,669	87,017	87,234
Difference (New-Old)		6,695	5,498	593	875	2,905
3. Household Sector
3.1 Financial Saving
Old (1993-94) Series		314,261	254,439	253,964	216,774	205,743
New Series	320,777	316,444	253,256	247,476	215,219	206,602
Difference (New-Old)		2,183	-1183	-6,488	-1,555	859
3.2 Saving in Physical Assets
Old (1993-94) Series		357,431	320,242	259,146	235,494	198,658
New Series	366,302	332,190	312,152	255,198	231,098	210,124
Difference (New-Old)		-25,241	-8090	-3,948	-4,396	11,466
4. Total Economy
Old (1993-94) Series		776,420	642,298	532,274	490,049	468,681
New Series	907,416	797,512	648,994	537,966	496,272	487,301
Difference (New-Old)		21,092	6,696	5,692	6,223	18,620
B. GDS as Percentage of GDP at Current Market Prices
1. Public Sector
Old (1993-94) Series		-0.34	-1.08	-2.73	-2.31	-1.04
New Series	2.22	1.02	-0.66	-2.03	-1.76	-0.85
Difference (New-Old)		1.36	0.42	0.69	0.56	0.18
2. Private Corporate Sector
Old (1993-94) Series		4.14	3.83	3.57	4.12	4.35
New Series	4.84	4.38	4.07	3.58	4.13	4.45
Difference (New-Old)		0.24	0.25	0.01	0.01	0.10
3. Household Sector
3.1 Financial Saving
Old (1993-94) Series		11.39	10.33	11.18	10.37	10.62
New Series	10.28	11.46	10.34	10.85	10.21	10.55
Difference (New-Old)		0.08	0.01	-0.33	-0.16	-0.08
3.2 Saving in Physical Assets
Old (1993-94) Series		12.95	13.00	11.41	11.27	10.26
New Series	11.74	12.03	12.74	11.19	10.96	10.73
Difference (New-Old)		-0.92	-0.26	-0.22	-0.31	0.47
4. Total Economy
Old (1993-94) Series		28.13	26.07	23.43	23.45	24.20
New Series	29.07	28.89	26.49	23.58	23.55	24.88
Difference (New-Old)		0.76	0.42	0.15	0.09	0.68
Source: Same as in Table 1

Finally, within the public sector, the upward revisions in saving estimates have occurred under departmental and non-departmental commercial enterprises but the bulk of change has occurred under departmental enterprises (Table 9) due to a major change

Table 9 : Gross Savings of the Public Sector, 1999-2000 to 2004-05: A Comparison of Old and Revised Estimates (Rupees, crore)
		2004-05	2003-04	2002-03	2001-02	2000-01	1999-00
1.Public Sector
Old (1993-94) Series			-9,429	-26,652	-61,912	-48,361	-20,049
New (1999-00) Series		69,390	28,026	-16,181	-46,377	-37,062	-16,659
Difference (New - Old)			37,455	10,471	15,535	11,299	3,390
	(i) Administrative Dept.& Quasi Government Bodies
	Old (1993-94) Series		-118,744	-126,341	-137,772	-113,125	-96,151
	New (1999-00) Series	-84,552	-101,206	-128,194	-137,845	-115,491	-98,409
	Difference (New - Old)		17,538	-1,853	-73	-2,366	-2,258
	(ii) Departmental Enterprises
	Old (1993-94) Series		2,417	3,104	578	4,905	11,099
	New (1999-00) Series	16,468	14,494	13,119	12,588	17,281	23,277
	Difference (New - Old)		12,077	10,015	12,010	12,376	12,178
	(iii) Non-Departmental Enterprises
	Old (1993-94) Series		106,898	96,585	75,282	59,859	65,003
	New (1999-00) Series	137,474	114,738	98,894	78,880	61,148	58,473
	Difference (New - Old)		7,840	2,309	3,598	1,289	-6,530
Source: Same as in Table 1 and CSO (2005): National Accounts Statistics 2005.

effected in the treatment of operating losses as imputed subsidies instead of treating them as negative operating surplus. For administrative departments, there has been a significant improvement in the year 2003-04 and probably thereafter following the decline in revenue deficits, as shown in Table 10.

Table 10 : Trend in Revenue Deficit: Combined for Centre and States
Year	Amount (Rupees,crore)	Per cent to GDP
1999-00	121,393	6.2
2000-01	138,803	6.6
2001-02	159,350	7.0
2002-03	162,990	6.7
2003-04	159,500	5.8
2004-05(RE)	128,355	4.1
2005-06(BE)	119,806	3.4
Source: RBI(2005): Handbook of Statistics on the Indian Economy 2004-05.

As for capital formation estimates, as shown in Table 7 earlier, there are no dramatic changes as between the old and the revised series at the aggregate level. As in the case of domestic saving rates, the gross capital formation (GCF) rates are higher by about one percentage point in each of the five years 1999-2000 to 2003-04. However, there are significant differences in capital formation estimation procedures which have led to differences in the compositions of GCF as between the old and new series. The foremost one concerns the category of ‘valuables’ included for the first time as part of GCF in the revised series. This category covers expenditures on such valuable goods as gold, silver, precious stones, and jewellery. As may be seen in Table 11, this new “valuables” category alone accounts for the differences in GCF estimates at the aggregate level as between the old and new series (more on it later).

Table 11: Role of “Valuables” in the New Series (All as Percentages of GDP at current market prices)
Year	GCF Estimates			‘Valuables’ included in the new series
Year	New Series	Old Series	Difference (2)–(3)	‘Valuables’ included in the new series
(1)	(2)	(3)	(4)	(5)
1999-2000	26.0	25.3	0.7	0.8
2000-01	24.2	23.8	0.4	0.7
2001-02	23.0	22.6	0.4	0.6
2002-03	25.3	24.8	0.5	0.6
2003-04	27.2	26.3	0.9	0.9
2004-05	30.1	-	-	1.3
Source: Same as in Table 1

The second major difference concerns the GCF estimation by institutional categories. As depicted in Table 12, GCF estimates attributable to the public sector and the private corporate sector have been considerably revised upwards, the former by about 9 to 17 per cent and the latter by about 12 to 52 per cent during the past five-year period. On the other hand, the GCF estimates for the household sector have been revised downwards in almost all the years except for the base year 1999-2000 when there was a 6 per cent upward revision for this sector too. No doubt, the downward revisions in respect of the household sector have been meagre ranging from (-)2 per cent to (-)7 per cent. The upward revisions in the GCF estimates of public and private corporate sectors have to perforce lead to a downward revision in GCF estimates for the household sector because the latter are derived as a ‘residual’. Even so, downward revisions in the estimates of household estimates have been meagre because there have been upward revisions in the estimates of aggregate GCF too. As a result of the revisions made above for the institutional categories, private corporate sector investment as percentage of GDP has shot up from a range of 4 to 6 per cent to 5.50 per cent to 8.50 per cent. The public sector investment rate too has gone up by about 1 to 2 percentage points, while the household sector rate has experienced some fractional fall (Table 13).

As is widely known, the composition of GCF by institutional categories is done only at the unadjusted level and hence, it does not cover the ‘errors and omissions’ which are used for adjusting the aggregate GCF estimated through the commodity flow method against the yardstick of investible funds available through domestic saving plus capital inflow from abroad. This brings us to the third aspect of change in GCF estimates, which is that in the new series the size of such “errors and omissions” has been drastically brought down from the old series. For 1999-2000, it has come down from 1.67 per cent to (-) 0.15 per cent, and for 2003-04, from 3.30 per cent to 0.96 per cent of

GDP(Table 13). As commented upon at a later stage, a part of this has been due to the inclusion of “valuables” as a new item in the estimates of GCF (Table 14). No doubt, even after accounting for the “valuables”, there is some reduction in “errors and omissions” due probably to the improvements in the estimation procedures.

Table 13: Capital Formation By Type of Institution at Current Prices Percentages to GDP at Current Market Prices
			New (1999-2000) Series
			2004-05 (QE)	2003-04 (PE)	2002-03	2001-02	2000-01	1999-00
1	Gross Capital Formation		28.49	26.29	25.27	24.30	24.27	26.15
	1.1	Public Sector	7.22	6.53	6.17	6.91	6.92	7.48
	1.2	Private Corporate Sector	8.25	6.84	5.78	5.59	5.69	7.15
	1.3	Household Sector	11.74	12.03	12.74	11.19	10.96	10.73
	1.4	Valuables	1.29	0.89	0.57	0.62	0.70	0.79
2	Finances for Gross Capital Formation		30.10	27.25	25.33	22.96	24.15	26.00
	2.1	Gross Domestic Savings	29.07	28.89	26.49	23.58	23.55	24.88
	2.2	Net Capital Inflow	1.03	-1.64	-1.16	-0.62	0.61	1.12
3	Errors and Omissions (2-1)		1.61	0.96	0.06	-1.35	-0.12	-0.15
4	Gross Capital Formation 1+3)		30.10	27.25	25.33	22.96	24.15	26.00
	(adjusted for errors & omissions)		100.00	100.00	100.00	100.00	100.00	100.00
				1993-1994 Series
				2003-04 (QE)	2002-03	2001-02	2000-01	1999-00
1	Gross Capital Formation			23.03	22.65	22.18	22.62	23.66
	1.1	Public Sector		5.58	5.36	6.17	6.29	6.94
	1.2	Private Corporate Sector		4.50	4.29	4.61	5.06	6.46
	1.3	Household Sector		12.95	13.00	11.41	11.27	10.26
	1.4	Valuables		0.00	0.00	0.00	0.00	0.00
2	Finances for Gross Capital Formation			26.34	24.77	22.60	23.84	25.33
	2.1	Gross Domestic Savings		28.13	26.07	23.43	23.45	24.20
	2.2	Net Capital Inflow		-1.80	-1.30	-0.82	0.39	1.14
3	Errors and Omissions (2-1)			3.30	2.12	0.42	1.22	1.67
4	Gross Capital Formation 1+3)			26.34	24.77	22.60	23.84	25.33
	(adjusted for errors & omissions)			100.00	100.00	100.00	100.00	100.00
	Source: Same as in Table 1 and CSO (2005): National Accounts Statistics 2005

Table 14: “Errors and Omissions” and “Valuables” in GCF Estimation Percentages to GDP at Current Market Prices
Year	Errors and Omissions			‘Valuables’ included in the New Series
Year	New Series	Old Series	Difference (New-Old)	‘Valuables’ included in the New Series
1999-2000	-0.2	1.7	-1.9	0.8
2000-2001	-0.1	1.2	-1.3	0.7
2001-2002	-1.4	0.4	-1.8	0.6
2002-2003	0.1	2.1	-2.0	0.6
2003-2004	1.0	3.3	-2.3	0.9
2004-2005	1.6	-	-	1.3
Note: For details, see Table 13; see also the text

A third and final major revision in the GCF estimates emanates from a heroic methodological change effected in the new NAS with the intention of eliminating discrepancies between gross fixed capital formation (GCFC) estimates made by the commodity flow method and the industry-wise GFCF estimates made by the expenditure method. What the CSO has done is to assume that GFCF estimates obtained from the commodity flow method for the entire economy as firm estimates and adjust the industry-wise GFCF estimates for private corporate and household sectors pro rata with the estimates compiled by institutional categories. This methodological change has brought about large increases in the GCF estimates for all sectors of the economy. The largest and persistent change in GCF ranging from 42 per cent to 236 per cent has occurred under “construction” – an area for which the new series has made as explained below a significant upward revision even before the proportionate adjustment. While the agricultural sector has got 42 per cent to 72 per cent upward revision in investment, many areas of the services sector have got much more; similarly, the unregistered manufacturing. The logic of these relatively sharper upward revisions in respect of informal sectors lies in the fact that the entire NAS revision exercise seems to have updated the data base for such sectors and this would have tended to revise upward the GCF estimates for these sectors even before the pro rata adjustment.

VII

Estimational Issues in Saving and Capital Formation: A Brief Comment

As explained earlier, following the revision in the series, there have been sizeable increases in the savings of the public sector, some increase in those of the private corporate sector, and some downward revisions in those of the household sector. These revisions have been based on some changes in coverage and procedures effected in the estimational processes which have been of a significant nature and which, except for some, appear realistic and should be welcomed. But, these revisions have hardly addressed the long-standing issues of improving the data base for the sectoral estimations of saving and capital formation.

Saving Estimation

Admittedly, there are serious gaps in data base for the estimations of household savings (i) in deposits of non-banking financial companies (NBFCs), (ii) in informal sector financial assets, (iii) in currency holdings with the public (93 per cent of which is treated as part of household saving since 1985-86), and (iv) in shares of companies for want of regular surveys on ownership of company shares. In the case of the corporate sector, until the Union Ministry of Company Affairs’ MCA 21 programme, which envisages online filing of accounts by the companies, becomes a success and until those accounts are cleaned and processed, estimates of saving for the corporate sector will continue to depend on weak data base.

No doubt, the procedural changes effected in classifying government expenditures as capital expenditures which impact saving estimation are substantial; they are: (i) head office expenditures of government departments in which it is revealed that a lot of expenditure is incurred on machines and equipments, furnitures, photocopiers, computer hardware, software and other accessories which were all earlier treated as consumption expenditure; (ii) inclusion of data in respect of some government schemes like Indira Awas Yojana (IAY), Prime Minister’s Grameen Sadak Yojana (PMGSY), as part of GFCF; and (iii) some parts of the outlays on schemes like Sarva Shiksha Abhiyan (SSA), district primary education programmes and mid-day meal schemes, which are now included as part of GFCF. Besides, the losses of departmental enterprises in power, manufacturing, transport, etc., were being treated as negative operating surplus earlier. As recommended by the SNA 1993, these have now been treated as imputed subsidies and hence savings and other components of GDP have gone up in respect of the departmental enterprises, as shown earlier.

It is not that saving estimations of household and corporate sectors have remained untouched; as brought out above, their numbers have undergone noticeable changes. In the case of the private corporate sector, saving estimates stand revised as a result of two factors: (i) revised earnings of foreign companies, a component of FDI in India, has been excluded from the saving of private corporate sectors and included as part of property and entrepreneurial income from the rest of the world; and (ii) upward revision in the estimates of gross saving of cooperative societies an quasi-corporate bodies on account of the availability of fresh data. Likewise, the estimates household sector savings have been revised due to five factors: (i) incomes accrued to households but not paid on account of investment in UTI units are now included in the estimates of household saving in the form of shares and debentures; earlier they were treated as part of public sector savings; (ii) incorporation of fresh data in respect of household investment in private insurance companies has been done since 2002-03, (iii) households’ net deposits have been revised downwards due to revision in the deposits of NBFCs and advances by cooperative societies to households; and (iv) finally, the household saving in capital assets has been substantially revised upwards due to the general upward revision of capital formation estimates.

Capital Formation Estimates

As shown earlier, the capital formation estimations have undergone changes in all categories; by type of assets, by institutions and by industry of use. As per assets, substantial change has occurred in the estimation of new construction. Under the accounted (pucca) construction, inclusion of import of wood products, and use of ASI 1999-2000 results on basic materials, etc. have resulted in sizeable change in estimation. The coverage of unaccounted (kutcha) construction has been expanded to include civilian construction in installing wind energy systems and seven more additional plantation crops in cultivated assets. As for machinery and equipment, the main changes introduced relate to: (i) preparation of a revised capital goods item basket using the detailed results of ASI 1999-2000 based on NIC 1998 classification; and (ii) the results of the NSSO 56^th Round of unregistered manufacturing for 2001-02.

Under institutional sectors, the estimates for public sector have been revised upwards mainly due to the reclassification of expenditures of government in the new series as explained above under the sub-section on saving estimates. Similarly, private corporate sector investment has gone up due to the inclusion of expenditures on software, wind energy systems, additional coverage of cultivated assets and capital expenditures made by new industries before commencing production. Finally, the rise in the household sector capital formation has been mainly due to the overall increase in gross fixed capital formation, estimated through commodity flow approach, which in turn was due to the increase in the output of construction and due to the revision in item-baskets of machinery and equipment as per NIC 1998 and use of latest available data on registered and unregistered manufacturing sectors.

Two key misgivings

All of the above changes obviously constitute measures of improvement in the estimation procedures which deserve to be commended. But, there are two crucial changes in methodology and coverage effected which raise misgivings about their tenability and hence call for their reconsideration.

The first one concerns the pro rata adjustment made to the industry-wise estimates with the estimates made by the commodity-flow method. Amongst the three sets of assumptions involved in this adjustment, two, namely, (i) estimates made by the commodity flow method are more reliable than those made by the expenditure method industry-wise and (ii) adjustments, if any, are required to be made in the estimates for private corporate and household sectors, appear uncontestable. What is contestable is the third assumption that the differences between the two methods are distributed industry-wise in proportion to their GCF estimates prior to the adjustment. There does not appear to be any basis for it, and as the sums involved are very large, the results may appear sensitive to the errors in respect of even a few industries. That apart, such pro rata adjustment made to the industry-wise estimates, has tended to hide the discrepancies found in the two sets of estimates and hence, it has deprived the researchers and even official agencies of keeping a close watch on the differences in the two estimation procedures as the years roll by.

The second most conspicuous and what seems to be an inadmissible method adopted concerns the coverage given to a new category of “valuables” in the estimation of capital formation, which is attributed to the recommendations of 1993 SNA and which has further enhanced the GCF rate by 1.3 per cent of GDP (or by Rs 40,146 crore) for 2004-05. The method adopted is patently an incorrect interpretation of the UN SNA recommendations. UN SNA 1993 had said that “Valuables are expensive durable goods that do not deteriorate over time, are not used up in consumption or production, and are acquired primarily as stores of value”. It had also said that acquisitions and disposition of “valuables” are to be recorded in the capital account, but not as a component of capital formation, The UN SNA systematically excludes “acquisitions less disposals of valuables” from the composition of gross fixed assets formation and locates it after ‘changes in inventories’. There are a number of other items in the capital account which do not form part of gross capital formation. It has been explicitly recognised that such net acquisitions of ‘valuables’ do not contribute to production nor can there be any imputed earning or rentals for such assets.

If the CSO’s method of including ‘valuables’ as part of GCF is accepted, there ought to be a counterpart saving to finance such investment. Household saving estimation in India is not directly done as the difference between household income and consumption, rather it is done indirectly through the estimates of saving in the form of financial and physical assets formation without taking account of “valuables”. Hence, net acquisitions of ‘valuables’ get completely ignored in the CSO’s saving estimation procedure, whether now or in the past. This contradicts CSO’s acceptance now of the UN SNA thesis that ‘valuables’ ought not to be treated as part of consumption. To be consistent with the CSO’s treatment of ‘valuables’ in GCF, an equivalent amount has to be added to the estimation of domestic saving. If this is done as is shown in Table 15, the domestic saving rate goes up by 1.3 percentage point (or by Rs 40,146 crore) to 30.4 per cent and the consequential “errors and omissions” between the finances for GCF and the unadjusted GCF almost doubles from Rs 50,310 crore (1.6 per cent of GDP) to Rs 90,456 crore (2.9 per cent). Overall, it thus appears improper to include ‘acquisitions of valuables’ as part of GCF both conceptually and from the view point of its operational significance (see also EPW editorial of February 11, 2006).

Table 15 : Impact of "Valuables" on "Errors & Omissions" (Rupees, crore)
			2004-05	2003-04	2002-03	2001-02	2000-01	1999-00
1	Gross Domestic Capital Formation (GDCF)		889,245	725,630	619,014	554,468	511,590	512,214
	including Valuables		(28.5)	(26.3)	(25.3)	(24.3)	(24.3)	(26.1)

	1.1	Valuables	40,146	24,484	13,957	14,187	14,724	15,519
	1.2	Gross Domestic Capital Formation(GDCF)	849,099	701,146	605,057	540,281	496,866	496,695
		excluding Valuables (Commodity Flow Method)	(27.2)	(25.4)	(24.7)	(23.7)	(23.6)	(25.4)

2	Finances for GDCF		939,555	752,132	620,508	523,737	509,026	509,289
	2.1	Gross Domestic Savings	907,416	797,512	648,994	537,966	496,272	487,301
	2.2	Net Capital Inflow	32,139	-45,380	-28,486	-14,229	12,754	21,988

3	Errors and Omissions (2-1)		50,310	26,502	1,494	-30,731	-2,564	-2,925
			(1.6)	(1.0)	(0.1)	(-1.3)	(-0.1)	(-1.5)

4	Finances for GDCF (Adjusted)		979,701	776,616	634,465	537,924	523,750	524,808

	4.1	Gross Domestic Savings	907,416	797,512	648,994	537,966	496,272	487,301
	4.2	Valuables	40,146	24,484	13,957	14,187	14,724	15,519
	4.3	Net Capital Inflow	32,139	-45,380	-28,486	-14,229	12,754	21,988

5	Adjusted Errors and Omissions (4-1)		90,456	50,986	15,451	-16,544	12,160	12,594
			(2.9)	(1.8)	(0.6)	(-0.7)	(0.6)	(0.6)
	Memo Item (4.1+4.2)	as per cent of GDP	(30.4)	(29.8)	(27.1)	(24.2)	(24.2)	(25.7)
Note: Figures in brackets are percentages to GDP at current market prices. Source: Same as in Table 1 and CSO (2005): National Accounts Statistics 2005

A long-standing methodological error

Finally, an issue that has remained unattended to by the CSO, despite the recommendations of the Raj Working Group (RBI 1982) as well as the Chelliah Working Group (DoS 1996), relates to the inadvisability of adjusting the GCF estimates arrived at by the commodity-flow method with its difference from gross saving including capital inflow from abroad. The Raj Working Group had opined that it was improper to conceive the measure of saving plus foreign capital inflow as the controlling total and then adjust the independently-estimated gross capital formation numbers by the difference and treat this difference as “errors and omissions” (EPWRF 2004). It had proposed that the difference be retained as ‘statistical discrepancy’ without making any adjustment to any of the independent estimates. The fear expressed by the Raj Working Group that as the adjustment is made only at the aggregate level and not at the sectoral level, “the present method has created a serious analytical problem in the sense that no consistent sectoral shares in gross or net capital formation could be worked out” (p.128), remains unaddressed, despite the claim to the contrary.. On examining the status of Raj Working Group recommendations, the Chelliah Expert Group’s status report (DoS 1996) said that the recommendation had been implemented and the term “errors and omissions” substituted by the term “difference”. But, in reality, no such change has been effected and the CSO’s National Accounts Statistics year after year continues to present, as in the past, the figures of “errors and omissions” representing the difference between total savings (domestic and foreign) and the estimated figures of gross capital formation by the commodity flow method (see item 3 in Table 15). Notwithstanding such a strong case for avoiding it, the CSO has retained the erroneous method of deriving “errors and omissions” and presenting an adjusted capital formation series as the final investment estimates even in the revised series.

Final GCF rate sans valuables and ‘errors and omissions’

If the adjustment for “errors and omissions” are thus not made and if the value of “valuables” are excluded from the GCF estimates on the ground that they do not constitute any productive capital asset creation, the figure of GCF rate for 2004-05, which has been placed by the CSO at such a high level as 30.1 per cent for 2004-05, should be appropriately placed at 27.2 per cent (Table 16). Thus, the image of the economy gets sobered down to a statistically more realistic investment level of 25-27 per cent of instead of 27-30 per cent as per the data for the past two years.

Table 16: GCF Estimates sans Valuables and ' Errors and Omissions'
			(Rupees, crore)
	Final GCF as			Errors &	GCF Estimated by Commodity
Year	Estimated		Valuables	Omissions	Flow Method (2-3-4)
	by CSO
(1)	(2)		(3)	(4)	(5)
1999-00	509,289	*26.0*	15,519	-2,925	496,695	*25.4*
2000-01	509,026	*24.2*	14,724	-2,564	496,866	*23.6*
2001-02	523,737	*23.0*	14,187	-30,731	540,281	*23.7*
2002-03	620,508	*25.3*	13,957	1,494	605,057	*24.7*
2003-04	752,132	*27.2*	24,484	26,502	701,146	*25.4*
2004-05	939,555	*30.1*	40,146	50,310	849,099	*27.2*
Note: Figures in italics are percentages to GDP at current market prices. Source: Same as in Table 1; col.(5) is derived by us; see also Tables 13 and 15.

A legitimate question that may be posed is whether it is realistic to place gross capital formation rate at a level (27.2 per cent) lower than that of domestic saving rate (29.1 per cent), particularly for a year, as in 2004-05, when there is current account deficit on the external sector. The obvious answer is in the affirmative because there can be leakages of domestic saving into unproductive assets. Expenditures on ‘valuables’ are one such distinct example. There are possibilities of overestimation of household financial savings (Mihir Rakshit 1982 and 1983 and EPWRF 1995 and 1996). Some others may be subsumed in the mass of data that cannot be captured overtly.

References

Chaudhuri, Saumitra (2005): ‘A Note on Investment and Savings’, Money and Finance, (ICRA Bulletin), January-June

CSO (February 2006): New Series of National Accounts Statistics (Base Year 1999-2000), February

-(2005): National Accounts Statistics 2005, May.

DoS (1996): ‘Saving and Capital Formation in India: 1950-51 to 1994-95’, Report of the Expert Group on Saving and Capital Formation (Chairman: Raja J. Chelliah), December

EPW (2006): ‘Higher Investment by Statistical Revision’ (editorial), Economic and Political Weekly, February 11.

EPWRF (2004): National Accounts Statistics of India 1950-51 to 2002-03: Linked Series with 1993-94 as the Base Year, Fifth Edition, December 20

-(1996): ‘Economic Reform and Rate of Saving’, Special Number, Economic and Political Weekly, September

(1995): ‘Economic Reform and Rate of Saving’, Economic and Political Weekly, May 6-13.

RBI (1982): Capital Formation and Saving in India 1950-51 to 1979-80: Report of the Working Group on Savings (Chairman: K N Raj), February

Rakshit, Mihir (1983):‘On Assessment and Interpretation of Saving-Investment Estimates in India’, Economic and Political Weekly, Annual Number, May

-(1982): ‘Income, Saving and Capital Formation in India’, Economic and Political Weekly, Annual Number, April

Shetty, S L (2005): ‘Saving and Investment Estimates: Time to Take a Fresh Look’, Commentary, Economic and Political Weekly (EPW), February 12

(Tabulations for this note, prepared by R. Krishnaswamy, are gratefully acknowledged; so also the efforts of K. Srinivasan in inputting the note)

According to revised estimates of annual national income for 2005-06, released by the Central Statistical Organisation (CSO) on Mayì¥Á7 ojected by the central government in its advanced estimates released in February 2006. These advanced estimates had underestimated the growth rate for farm sector at 2.3 per cent.

Australian wheat monopoly AWB and Agrico Trade and Finance SA have been shortlisted for providing 8 lakh tonnes of wheat in the country, though price negotiations have yet to be completed. This 8 lakh tonne s of wheat import has been a part of the new 3-million-tonneimport tender floated on May 08, 2006. While AWB is likely to supply 5 lakh tonnes and Agrico would offer 3 lakh tonnes, as against the earlier expressed willingness to supply 12 lakh tonnes and 5 lakh tonnes, respectively. The two companies have scaled down the supply due to stringent tender norms put forth by State Trading Corporation, which would be the canalising agency for wheat imports in the country. AWB has offered to supply wheat at $ 210 per tonne on cost and freight (C&F) basis while Agrico has quoted a price of nearly $199 per tonne on C&F.

Southwest monsoon has hit the country six days ahead of its schedule. The usual date of monsoon onset is June 01. However, an onset six days before or after this date is considered as normal onset.

The centre has plans to slash down the interest rates on agricultural loans to 5 per cent within next two years from the present 7 per cent. The canter has brought down interest rate on farm loans from 11 per cent to 7 per cent in 2005-06.

Indian textile exports to the US have registered an 18 per cent rise to $1.4 billion in terms of value and a modest growth of 12.3 per cent at 667 million metres in terms of volume in March 2006. While textile exports from China has been much higher at $ 4.7 billion, it has grown by just 0.13 per cent in terms of value. China’s exports have increased by 3.5 per cent at 3,601 million metres in terms of volume. Apparel exports from India have posted the highest growth of almost 21 per cent at $ 950 million.

As per the Coir Board, coir export from the country has jumped 11 per cent to an all-time high of 1,36,027 tonne in terms of quantity in 2005-06 from 1,22,927 tonnes a year ago. In value terms the exports have risen to Rs 508.45 crore in 2005-06 from Rs 473.40 crore in 2004-05, registering a growth of 7 per cent. Total exports, in 2005-06, have exceeded the target of Rs 490 crore. Coir and other coir-based products have been exported to more than 80 countries with the US emerging as the largest consumer garnering 40 per cent of the total export. European nations together have accounted for 41 per cent of the total export with the remaining 19 per cent shared by Canada, Japan, South Africa and UAE.

Rough estimates by the Marine Product Export Development Authority (MPEDA) has reiterated a miniscule fall of 0.8 per cent in the exports of marine products to 4,57,490 tonnes during 2005-06. In terms of value, however, the revenue earned has improved to $ 1,559 million in 2005-06, registering a 5.5 per cent rise over the period of one year. European Union has emerged as the largest importer with its share lying at 27 per cent (quantity wise) and 29.27 per cent (value wise), followed by US and Japan. Shrimp has been the largest exported product accounting for nearly 62 per cent of the value of export earned. Shrimp exports have been the highest to the US, which has stood at $ 309 million in spite of the anti dumping duty imposed on the Indian shrimp by the US.

Associated Chambers of Commerce and Industry (Assocham) has urged the finance ministry to replace the current SSI policy by an SME policy and allow 100 per cent foreign direct investment in the small and medium enterprises (SMEs) sector. It has also stressed on a concrete flexible labour policy with zero import duty on capital goods for infrastructural projects as a key for achieving 12 per cent manufacturing growth.

Automobiles

Excise duty on the Rs 45,000-crore domestic automobile components industry is planned to be levied on the maximum retail price (MRP). Currently, manufacturing of auto components attracts a 16 per cent excise duty on the factory-gate price. The Central Board of Excise & Customs (CBEC) had proposed a 35 per cent abatement (an offsetting reduction) along with the shift, sans any change in the tax rate. The new levy is expected to compress the margins in the auto components trade and might also result in price cuts in certain product segments. The new levy will give some semblance of a level-playing field to smaller auto parts manufacturing units, because the big players will now have to curb their promotional expenses to avoid a higher levy.

Chemicals and fertilisers ministry has declared that the maximum allowable post-manufacturing expenses (MAPE) of drug companies would be kept at 150 per cent of the production cost. Currently, the MAPE, which includes manufacturers’ and trade margins, is 100 per cent in case of the drugs under price control. In the control-free segment, there is no such overall ceiling, but in case of branded drugs, there is a government-brokered understanding between the industry and the trade that the wholesale and retail margins would not exceed 20 per cent and 10 per cent respectively. The ministry said in the case of generic drugs, the wholesale and retail margins should not exceed 15 per cent and 35 per cent respectively. At present, there are no caps on trade margins which in case of some generic medicines are as high as 1,000-2,000 per cent.

The government is scaling up its target for nuclear power generation from 20,000 MW to 40,000 MW by 2020 and considering amendments to the Atomic Energy Act to enable private participation in the sector. India is the only country which could offer small 300-500 MW reactors at commercially viable prices and countries like Malaysia, Indonesia and Vietnam have already expressed an interest in buying this technology from India. The capacity-addition programme has been based on a three-pronged strategy of developing PHWRs, fast breeder reactors (FBRs) and thorium reactors; while PHWR technology in the country is now commercially viable, FBR technology is still being fine-tuned. The country’s first FBR, the 500-Mw reactor at Kalpakkam is expected to be commissioned by the end of the year.

The Rural Electrification Corporation plans to sanction Rs 16,000 crore to power utilities in 2006-07, of which it plans to disburse around Rs 3,000 crore each for generation and distribution projects and Rs 1,000 crore for transmission projects and Rs 4,000 crore for rural electrification projects. REC believes that for its pump energisation programme ground water should be exploited in Bihar, Uttar Pradesh and West Bengal and not in Maharashtra and Gujarat.

The National Electricity Plan, an integral part of the 11^th Five-year Plan (2007-12), may target a generation capacity addition of 67,000 MW. Also, the government plans to add generation capacity of around 60,000 MW in the 12^th Five-year Plan (2012-2017) and will make this part of the plan. Of the 67,000 MW planned capacity by 2012, 20,000 MW will come from hydro-generation, 40,000 MW from coal-based power generation, 3,000 MW from nuclear power generation and 4,000 MW from non-conventional energy sources. Around 50 per cent of the generation has been planned in the central sector, 30 per cent from the state sector and the rest from the private sector. The resources for this capacity addition are being tied up with the ministries of coal, power, non-conventional energy sources and finance and the plan will immensely help the equipment manufacturers associated with the power sector.

National Thermal Power Corporation (NTPC), the country’s largest power producer, plans to set up a series of merchant power plants for direct sale of electricity to bulk consumers. Currently, NTPC’S entire power generation is sold to states at a break-even cost under long-term power purchase agreements with state electricity boards. The proposed plants will give NTPC an opportunity to sell electricity on better commercial terms to bulk buyers, either under long-term bilateral deals or under forward trading or in the spot market. At present, NTPC sells power at an average cost of Rs 1.57 a unit, which is expected to be much higher when sold to the proposed merchant power plants, given that power at peak hours currently fetches around Rs 6-7 a unit in the spot market. The NTPC has identified four hydel power projects (totalling 1,551 MW) to be set up as merchant power plants in Uttaranchal including the 600 MW Loharinag, 520 MW Tapovan, 260MW Rupsibagar and the 171 MW Lata Tapovan hydroelectric projects. The 500MW Korba extension project may also be used for merchant sale to bulk consumers directly.

Petroleum and Petroleum Products

The government is ready for 100 per cent bidding by private companies under NELP-VI and there is to be minimum interference from the government in the bidding process and all deals and regulations are to be transparent and non-discriminatory enabling greater participation from private companies to explore oil and gas in India.

The standing committee on petroleum and natural gas has recommended scrapping off the present system of setting rates as it is artificially inflating the prices, when the government is currently contemplating hiking petroleum products prices. Currently the prices at which an oil marketing company purchases the product from a refinery are being calculated by adding ocean freight, insurance, customs duty, ocean loss and port charges to the FOB price in the international market; this system artificially inflates prices of petroleum products refined domestically. Though the basic price at the refinery gates, calculated on the import parity basis, is uniform at all refineries throughout the country, the retail selling prices of the products are being calculated by adding excise duty, freight up to depots, marketing cost/margin, state-specific irrecoverable levies and dealers’ commission. The committee asked the government to explore the option of pegging the product’s price to its FOB price prevailing in global markets.

The coal ministry is in the process of finalising a new captive coal mining policy for the small scale industry (SSI) units. According to the proposed policy, the ministry will allocate captive coal blocks through competitive bidding to the SSI units. The idea is that a group of SSI units will form a consortium and apply for coal blocks for joint operations and captive mining of coal in the area of approved end users. Further, the SSI units with small requirements could apply for small and isolated reserves for using coal mined from such reserve in their plants, on a sub-lease basis, which will be awarded by Coal India Limited (CIL). As per the existing legal framework, companies in the private sector engaged in iron and steel production, power generation and cement production can mine coal for captive use in the respective end-use projects. The SSI units engaged in any of these businesses can apply for the unallocated coal blocks identified for mining under the new policy.

Cement companies have continued to enjoy last year's boom trend in April 2006 with the consumption having grown 10.18 per cent to 12.99 million tonnes (mt) as against last April’s 11.79 mt. The production too has witnessed a sharp growth, registering 12.18 per cent jump to 13.17 mt, during the month under review, as against 11.74 mt during April 2005. The first month has seen a capacity addition of 3.65 mt, taking the total installed capacity to 163.45 mt; Dalmia Cements, ACC and Jaypee Group have added 2.27 mt, 0.88 mt and 0.50 mt, respectively.

Railways

The Railway Board is reformulating a Cabinet note for a special purpose vehicle (SPV) for the dedicated freight corridor. The options being explored by the board include financing the SPV by offering some stretches on the build, operate and transfer (BOT) basis. A paper detailing the different financing options for the SPV will be prepared by the Railway Board and presented to the Planning Commission. The freight corridor project of the Indian Railway’s is estimated to cost Rs 22,000 crore. The corridor is not only expected to reduce transit time but also cost of operation. The department of economic affairs (DEA) has suggested that the structure of the SPV should not be such that it becomes an extension of the Railways and added that the SPV should be rated to raise resources from the market or multilateral agencies on non-recourse basis. It has also proposed that options for public-private participation in execution of the project could be explored.

INFLATION

The annual point-to-point inflation rate based on wholesale price index (WPI) has gone up to 4.74 per cent for the week ended May 20, 2006 from 4.32 per cent during the previous week. The inflation rate was at 5.38 per cent in the corresponding week last year.

The WPI in the week under review has increased by 0.3 per cent to 201.1 from 200.5 in the previous week (Base: 1993-94=100). The index of ‘primary articles’ group (weight 22.02 per cent) has risen considerably by 1.2 per cent to 199.7 from the previous week’s level of 197.3, mainly due to an increase in the price index of ‘food articles’ by 1.4 per cent and ‘minerals’ by 4.4 per cent as compared to the previous week. The index of ‘food articles’ has gone up to 203.8 from 201.0 in the previous week, mainly due to the higher prices of tea, poultry chicken, pork, fish marine, bajra, milk, fruits and vegetables, gram, barley and jowar. The index of minerals has gone up to 357.7 from 342.7 for the previous week, mainly due to the higher prices of steatite, barites and iron ore. The index of ‘fuel, power, light and lubricants’ group (weight 14.23 per cent) has declined marginally to 319.7 from the previous weeks’ level of 319.8, mainly due to the lower prices of furnace oil. 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 175.1 from 175 in the previous week, mainly due to an increase in the prices of food products, base metals, ‘machinery and machine tools’ and ‘transport equipment and parts’.

The latest final index of WPI for the week ended March 25, 2006 has been revised upwards; as a result both, the absolute index and the implied inflation rate stood at 197.2 and 4.06 per cent as against their provisional levels of 197 and 3.96 per cent, respectively.

Commercial banks have exceeded the target set by the government for flow of credit to agriculture sector in 2005-06. Against the target of Rs 87,200 crore fixed for 2005-06, banks disbursed Rs 1,07,900 crore, which is 125 per cent of the target, according to the Indian Bank’s Association (IBA). In the first 9 months of 2005-06 itself, banks had achieved 82 per cent of the target for the year. For 2006-07, a lending target of Rs 1,75,000 crore was set with 50 lakh new farmers to be financed. The commercial banks have also accepted finance ministry’s suggestion that banks should not charge interest on agriculture loans on compounded basis. The banks would charge interest on agricultural advances at annual rests instead of quarter or longer rests.

The Reserve Bank of India (RBI) has fined Bank of Baroda (BoB) for maintaining lower cash reserve ratio (CRR) and statutory liquidity ratio (SLR) in violation of the Banking Regulation Act. During the course of annual financial inspections, RBI had observed that BoB has netted the items representing internal and external liabilities in the inter-branch accounts, resulting in under-estimation of outside liabilities for the purpose of computation of net demand and time liabilities (NDTL) during April 1999 to March 2002. The bank reported lower NDTL (deposits) and as a result maintained less than required CRR and SLR during the period in violation of the provisions of section 24 of the Act. Banks have to maintain cash balances (currently 5 per cent) with RBI as CRR and invest a part of the deposits (currently 25 per cent) in government securities as SLR.

The RBI has fined a penalty of Rs 15 lakh on Centurion Bank of Punjab for breaching guidelines for funding maiden offers. This takes the total number of banks penalized for their role in the scam to 10. Centurion Bank has issued 10,200 cheques to a customer during a short period of two months without complying with the RBI guidelines and violating the know your customer (KYC) norms for opening accounts.

Prime Focus, has revised its lower range price band to Rs 417-Rs 500 per equity share from Rs 450-Rs 500 per equity share and has also extended the issue to June 3 as against previous closure of May 31.

Vigneshwara Exports Limited will be taping the market on June 7 with its public offer of around 47.6 lakh equity share with a price band of Rs 121 to Rs 140 per equity shares. The issue closes on June 13.

Allcargo Global Logistics Limited has tapped the market on June 2 with its public offer of 20.7 equity shares with a price band of Rs 625 to Rs 725 per equity share; the issue will close on June 6.

The fears of inflationary pressure and the consequent rise in the domestic interest rates and FIIs outflow continue to weighed down the market sentiments. The sensex has lost 358 points or 3.31 per cent to close at 10,451.33 and the S&P CNX Nifty has declined by 118.3 points or 2.72 per cent, to settle at 3091.3. The fall of the market was accentuated due to a delay in raising retail fuel prices. Weak global markets, a fall in base metal prices and introduction of securities transaction tax effective from June 1 led to further selling by the market participants. BSE Small-Cap has registered a decline of 8.72 per cent, which is above that recorded by sensex itself; meanwhile, amongst the sectoral indices all of them have registered losses over the week with the fast moving consumer goods index registering the highest weekly loss of 6.53 per cent followed by the public sector index at 4.80 per cent.

The FIIs have remained net sellers in the equity market for the month of May to the extent of Rs 7354.2 crore; while for the week ending June 2, 2006 they have sold worth Rs 1457.4 crore ;with purchases worth Rs 8180 crore and sales of Rs 9637.3 crore. Meanwhile, the mutual funds continued to support the market as they remained net buyers in the equity market to the extent of Rs 748.99 crore with purchases worth Rs 2416.87 crore and sales of Rs 1667.88 crore.

The NSE’s F & O segment continued to witness a decline in its total turnover on a weekly basis to Rs 124366 crore for the week ending June 2 from Rs 171273 crore for the week ending May 26. The stock futures continued to contribute the bulk of the trading with Rs 55601 crore, followed by index future at Rs 56050 crore

During the week, the RBI has mopped up Rs 1626.10 crore and Rs 2013.43 crore through 91-day treasury bill and 182-day treasury bill, respectively. The cut-off yields for 91-day and 182-day treasury bill were 5.7364 per cent and 6.1812 per cent, respectively. Also, the RBI has fixed rate of interest on the Floating Rate Bonds, 2009 applicable for the half-year (June 6, 2006 to December 5, 2006) at 6.28 per cent per annum.

Meanwhile, RBI has also announced the sale (re-issue) of 9.39 per cent 2011 paper and sale of a new 30-year government security for a notified amount of Rs 6,000 crore and Rs 4,000 crore, respectively.

During the week, the three important factors driving bond market sentiment are increasing inflation, potential fuel price hike, and a likely pause in US monetary tightening cycle. The inflation rate rose to 4.74 per cent due to an increase in food and manufactured product prices for the week ended May 20 raising apprehensions about interest rate hike in RBI's quarterly policy review next month. Moreover, the fall in bond prices was also triggered by concerns that weakness in the rupee might provoke the RBI to offload more dollars, which in turn would result in tightening of rupee liquidity. Further, with the global crude oil prices hovering around $ 70 a barrel and the robust economic growth reported at around 9.3 per cent reinforced the views of the imminent rate hike by the RBI. The weighted average YTM of 7.59 per cent 2016 paper stood at 7.6726 per cent on June 2, 2006 as compared to 7.6065 per cent on May 26,2006.

Meanwhile, the liquidity has been comfortable despite RBI intervention in the forex market, the call rates ranging between 5.47 per cent and 5.55 per cent. The daily average outstanding amounts in the LAF (reverse repo) operations conducted during the week stood at Rs 10186.72 crore.

In the corporate bond market, the yields rose over the week as expectations of a hike in the domestic fuel prices and announcement of a fresh bond auction weighed down the market sentiments.

During the week, a combinations of factors like rising FIIs outflows from the domestic equity market and strong month-end dollar demand from corporates weighed down heavily on the rupee movement, however the sentiments improved in the latter part of the week after a rebound in the domestic stock markets reinforced expectations of FIIs inflows. The rupee closed nearly flat at Rs 45.91 per dollar from Rs 45.89 per dollar in the previous week. Meanwhile, in the forward premia market the premias tracked the volatile spot rupee market with the 6-month annualised forward premia closing at 0.68 per cent on June 2,2006 as compared to 0.70 per cent on May 26,2006

During the week, the early onset of monsoon has resulted in a bearish commodity futures market. Lemon tur and urad have traded low on weak demand from traders amid ample supply; the news of import arrivals of lemon tur and urad from Myanmar further dampened the market sentiments and the reduction of margins for long positions by the exchanges failed to attract buyers. On the other hand, guar seed and guar gum trading has witnessed volatility before ending the week on a weak note amid strong industrial demand.

In a meeting held by the FMC, on May 29, about 25 select brokers have aired their views on various issues such as increasing initial margin, detailing and expanding the scope of know your client (KYC) norms, streamline trading hours in alignment of global exchanges and spot price discovery mechanism. Moreover, the members were of an unanimous view that Saturday trading was turning out to be a futile exercise as there was miniscule trading on those days and it was causing unwarranted drag on the member brokers.

The NCDEX has flayed allegations of any foul play in the rise of turmeric prices in the last one and a half month. In a report submitted to the FMC, the exchange has pointed out that the reasons for rise in the prices of turmeric has mainly due to weaker crop and increases in export demand.

ICRA has assigned an issuer rating of ‘IrAAA’ to Hero Honda Motors Limited (HHML). The agency has also re-affirmed the ‘LAAA’ rating assigned to the Rs. 150 million non-convertible debenture programme of HHML. The assigned ratings take into account HHML’s dominant position in the domestic motorcycle industry; its strong financial profile characterized by low gearing, large liquid investment portfolio, and strong operating cash accruals. The rating also takes into account the intensifying competition in the domestic two-wheeler industry with the entry of new players and new model launch, competition led pricing inflexibility and increasing costs leading to declining operating margins and limited opportunity for HHML to diversify geographically.

ICRA has reaffirmed the ‘A1+’ rating to the Rs. 500 million short-term debt (including commercial paper programme) of Motherson Sumi Systems Limited (MSSL). The rating takes into account MSSL’s strong position in the domestic wiring harness industry, diversified customer base with established relations with major passenger car manufacturers and strong profitability.

ICRA has suspended the rating of ‘LD’ assigned to the non-convertible debenture programme of SVC Super Chem Ltd. (SVC), following the agency’s inability to carry out a rating surveillance with the company SVC not providing the relevant information as sought by ICRA.

Crisil has assigned ‘ P1’ rating to the Rs 1 billion short-term debt programme of Religare Securities Limited. The assigned rating is driven by its status as a Ranbaxy promoter group company and the benefits derived thereof. The company's good market position in the domestic retail equity broking segment and its adequate risk management systems also support the rating. These rating strengths are, however, partially offset by the inherent uncertainties associated with the equity broking business and the company's relative small net worth base compared to its rating category.

Crisil has assigned ‘ AAA/Stable’ rating to State Bank of India’s (SBI) Upper Tier-II bond issue aggregating to Rs 25 billion. The ratings continue to reflect SBI’s dominant market position in the domestic banking industry, diversified resources profile, good earnings levels, a comfortable capital position, and good management.

Crisil has assigned an 'AA/Stable' rating to the innovative Tier-I perpetual debt Issue of UCO Bank aggregating to Rs 2.5 billion. The assigned rating continues to reflect the benefits of majority ownership by the Government of India of the UCO Bank. The ratings further reflect the bank's adequate liquidity position and resource profile.

Bharat Forge, world’s second largest forgings company, for the first time will supply products to the US operations of Japanese auto giants Toyota and Honda. Currently, Bharat Forge supplies auto components only to the Indian operations of Toyota and Honda. The company also supplies components t the US operations of DaimlerChrysler, General Motors and Ford.

TAG Sealogistics, major provider of marine support service, has secured five year contract valued at Rs 30 crore by Javaharlal Nehru Port Trust for its newly built high-tech 50 tonne bollard pull tug. The tug will be deployed for bringing large vessels to the shore and escort them from the jetty to the high seas.

Chambal Fertilisers and Chemicals has signed a shipbuilding contract with Hyundai Heavy Industries of South Korea for building of one Aframax Tanker (dead-weight tonne 1,05,830). The vessel is expected to be delivered by the end of the first quarter of 2009.

Larsen and Toubro Limited and Toyo Engineering Corporation, Japan has won a large-scale turnkey contract valued at over Rs 2600 crore from Indian Oil Corporation. The contract is for project management, engineering, procurement and construction of naphtha cracker and associated units at Indian Oil’s Panipat petrochemicals complex in Haryana.

Wipro Technologies, the global IT services company of Wipro Limited, has acquired European retail solutions provider Enabler for $ 53 million in all cash deal.

Adlabs Films has set up wholly-owned subsidiaries in the UK and US for overseas distribution of Indian films, film co-production and post production business.

Furnace Fabrica India has secured a contract to build a 45,000-barrel per day refinery in Yeman over Rs 3200 crore. The project will be owned by a company set up by Yemeni and Saudi investors.

Britannia Industries has posted 24.6 per cent jump in net sales to Rs 454 crore in the fourth quarter ended March 2006 and net profit has reported a 27 per cent growth to Rs 27.8 crore over the same period previous year. For the fiscal year 2005-06, the company’s net sales have risen by 13 per cent to Rs 1,713 crore over 2004-05. However, net profit has marginally down by 0.94 per cent to Rs 147 crore during 2005-06.

Tata Power Company has reported a 8 per cent rise in revenues to Rs 1,246 crore for the quarter ended March 2006. However, net profit has posted a fall of 18.6 per cent to Rs 138.8 crore over the corresponding quarter in the previous financial year. The company’s sales revenue has risen by 13 per cent to Rs 4,888 crore and it has registered 10.7 per cent growth in net profit at Rs 610 crore during 2005-06. The company has reported 7.5 per cent growth in annual sales at 13,616 million units in the fiscal year 2005-06 against 12,663 million units in previous year.

The country’s largest tractor and utility vehicle maker Mahindra & Mahindra (M&M) has reported net sales of Rs 2,288 crore for the quarter ended March 2006, a 19.8 per cent growth over the same period previous year and its net profit has augmented by 110 per cent to Rs 321 crore. For the fiscal year ended 2005-06, M&M has reported a growth of 23 per cent in net sales at Rs 8,222 crore over 2004-05 and its net profit has surged by 67 per cent to Rs 857 crore.

Tata Chemicals has reported a 4.6 per cent rise in net sales at Rs 753 crore for the quarter ended March 2006. However, it has reported a 42.03 per cent dip in net profit at Rs 64.4 crore over the corresponding quarter in the previous year. The company’s net sales have higher by 17 per cent to Rs 3,517 crore for 2005-06 and it has reported a 3.7 per cent increase in profit after tax at Rs 353 crore over the previous year.

Two-wheeler market leader Hero Honda has posted a 16 per cent rise in sales turnover in net sales to Rs 1976 crore for the quarter ended March 2006 and its net profit has reported a 29 per cent growth at Rs 267 crore over the same period a year ago.

Bombay Dyeing reported a 25 per cent decrease in net sales to Rs 212 crore for the quarter ended March 2006. The company has suffered a net loss at Rs 7.4 crore as compared with a net loss of Rs 3.44 crore in the corresponding quarter a year ago.

EXTERNAL SECTOR

According to World Bank’s Annual Report, net private capital flows to developing countries have touched a record $490.5 billion in 2005, up from $396.6 billion in 2004, indicating robust economic growth in the developing world.

India has imposed a provisional anti-dumping duty on imports of silk fabric from China weighing 20-100 grams per meter. The duty has been imposed on the basis of the recommendations made by the Directorate-General of Anti-dumping and Allied Duties (DGAD), which concluded that the domestic industry had suffered material injury on account of the imports and that the goods had been exported to India at a rate below the normal.

The Central Board of Excise and Customs has introduced several simplified procedures for export-oriented units, including allowing import of goods without payment of duty on the basis of pre-authenticated procurement certificates to units with physical export turnover of Rs 15 crore in the preceding financial year and a clean record.

According to Nasscom report, the country’s software and IT-enabled service exports grew 33 per cent in value terms during 2005-06, recording $23.6 billion revenues compared with $17.7 billion earned during the previous year and has projected that overall software and services will grow by 28 per cent, clocking revenue of $36-38 billion in 2006-07. Exports are likely to grow by 27-30 per cent, posting revenue between $29 and $31 billion. The total number of people employed in software and IT-enabled service sector, including the BPO sector, has increased 22.32 per cent to 12,93,000 in 2005-06 compared with from 8,67,000 in the previous year.

Bharat Sanchar Nigam Ltd. (BSNL) has issued orders to all its circles to recover dues towards transit charges of Rs 0.19 per minute for its cellular services from Tata Teleservices and Reliance Infocomm.

*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.